CFD Trading

“Contract for difference” is also known as CFD. It refers to financial derivative products used in stock market trading to obtain profits from decreases or increases of the market. This kind of contract is signed between seller and buyer.

Through this contract, the seller agrees to give to the buyer the difference between an asset’s value at the time of trading and at the time of the agreement. Short term investors and day traders are regular users of this financial product. CFDs, however, are not allowed in the U.S., but in many other countries they are.

Advantages

Among other trading products, CFD has proved the most popular due to its various advantages. Leverage is the most beneficial advantage as it gets to 10:1 or, sometimes, even 20:1. This leverage type makes it possible to get larger profits with small deposits. For example, for a 10% leverage asked by the seller, one can invest $10,000 and buy $100,000 worth CFDs. CFDs also allow both going long and short. This way, both falling and rising markets can bring benefits.

There are many CFD providers who allow 24 h per day trading. This means you can do the trading in the evening and even later, after the closing of the market. It takes only seconds to trade, so you don’t need to depend on a dealer for the order processing.

Profit can be gained in shorter time with CFD trading. In addition to this, there are also many options for making investments with this type of trading products. You can choose commodities, assets, currencies etc to invest in. Stop loss orders are another benefit you can use along with the CFD you are acquiring.

Disadvantages

However, not all is pink about CFD. There are some disadvantages, as well. At certain times, leverage can become quite disadvantageous. Investing a small value and the falling of the prices with a really high percentage such as 80% combined can lead to a greater loss than the initial investment. Slippage is another element that can cause considerable loss out of an initial profitable trade. For investments of large amounts of money it is not recommended to use CFDS, either. Moreover, this trading product should not be used in very long term investments.

Of course, no investment option is perfect. You can make a list of pros and cons for all these products. Still, you’ll never find one that qualifies as clear winner. The best investment plan depends on what you need and want to gain and what type of investment suits your style the best. However, understanding CFD trading thoroughly with both pitfalls and benefits can easily lead to minimizing losses.

Trading

CFD providers and individual traders are the ones trading CFDs. CFDs do not bear standard contract terms, so these can be specified by CFD providers according to their trading interests. However, there are some common points for most CFD contracts.

To start the CFD, the trader opens a trade with a CFD provider on a certain instrument. This way a position is created within the instrument.