The CFD in CFD trading stands for contract for difference which enables you to bid in an over-the-counter market through an underlying asset, also known as instruments, like Forex, shares, treasuries, indices, and commodities. Just like spread betting, CFD is also a financial derivative that gives a trader the chance to profit out of the price movements instead of owning the entire underlying asset. The trader can also speculate on the changes in the price rather than purchasing an asset.
How does CFD Trading work?
With CFD, an opportunity to profit is given to traders whenever a market goes up or down. This is a pliable alternative that gives trader flexibility when trading prices instead of purchasing the asset directly. When you do not own an underlying asset, you can trade even when the market is falling or rising, 24 hours every day.
Trading CFD allows you to gain access to a larger part of the market since it is leveraged, without risking the full payment cost that you need when opening a trade. However, the only downside is that the potential losses are the same as with the potential profits. The profit and losses will both be calculated based on the entire size of the position. The underlying asset is calculated based on the point of opening to the closing of the trade. You must also consider the consequence in which the losses might be greater than the deposit. Be careful with your funds as your leverage ratio plays a very important role in your success.
Trading CFD has two different types – maintenance margin and deposit margin.
Deposit margin is the amount that is needed to open a position in trading. Meanwhile, a maintenance margin is required if there’s a possibility of your deposit margin not to cover any potential losses. Once these instances occur, you may contact your broker to top up. Remember that insufficient funds might lead to the closure of your trading position.
Hedging can also be used in CFDs to incur losses.
It is the difference between the buy price and the selling price in trading CFD. Always remember that the price when buying trades is always higher compared to the market price, thus, the selling price should be much lower. Most of the time, the spread covers the cost of opening a CFD position.
List of Advantages Offered by Trading CFD
- It does not expire
- It may be used as a hedging strategy
- It enables a trader to deal be it in a falling or rising market
- It gives the trader the capability to go for short and long underlying assets
- It offers a variety of markets where a trader can engage in different markets including Forex, commodities, indices, and shares
- It provides higher leverage.
List of Disadvantages Offered by Trading CFD
- It can be risky considering that you cannot trade without an impressive strategy as well as risk management.
- The cost of spread goes to the CFD traders. They need to pay for the closing and opening positions.