CFD - Contract For Difference
CFDs are instruments which allow trading on different kinds of financial products without ever owning any of the assets traded on. In essence, a CFD is an agreement (hence "contract") between a trader and a broker where each side is obliged to pay the other the difference between the value of the product traded on when the trading position was opened and its value upon closing of the trading position.
Brokers may offer CFDs for stocks, Forex currency pairs, commodities, index, treasury and other financial products. The popularity of CFD trading has grown extensively over recent years thanks to the advantages it holds:
- Brokers tend to offer higher leverage options so far as CFD trading is concerned. Leverage allows traders to cash in on opportunities, even if they do not have the capital necessary to make trades of significant volume independently. Since leverage may also increase losses, it is important to use some type of risk management strategy.
- Since CFDs are offered by the broker, it can easily be made available anytime, from anywhere and all through. The use of a simple, user-friendly, universal trading platform.
- Brokers offering CFD trading provide traders with a wide range of tools, such as stop loss and take profit limits. The fees associated with CFD trading are very low. Brokers do not charge commissions, but rather fix an ask price slightly (several pips) lower than the bid price.
Making Profits Trading CFDs Online
Trading CFDs online are conducted between a trader and a broker offering this kind of trading via the online trading platform they operate. When the trader gives an order to buy a certain kind of CFDs (Forex, CFDs for instance) the funds, they choose to invest award them an amount of CFDs equal to the sum they allocated for making the trade divided by the value of the product traded on at the time. If the Value then goes up, they can give an order to sell and be awarded a sum equal to the new, higher value, multiplied by the amount they had bought. Just like when trading any other financial product, profit is made when the product can be sold at a higher price than the price it was bought for. CFD Trading Strategies
Just like trading with any other financial product traders engaging in CFD trading utilize trading strategies in order to minimize risk and raise the chances of making profits as substantial as possible. Here are popular CFD trading strategies:
- Making short term trades. Investing in a CFD which is on the rise and selling quickly even if at a relatively low profit. This is possible since there are no stamp duties or commissions.
- Using the "stop-loss" risk management strategy in order to limit the sum which may be lost in a worst-case scenario.
- Trading pairs. When it becomes apparent that the volume of trading in CFDs of one company's stock is much higher than that of CFDs of a similar company's stock. Quick profits can be made trading on CFDs of the overvalued company and long-term profits trading on CFDs of the undervalued one.
- Using leverage to increase many times over the profit made trading on CFDs the value of which is highly likely to rise.
It is important to remember that when trading CFDs you are entering into an agreement with the broker. It is therefore essential to trade CFDs only with a reliable well-established broker. Trading CFDs with us is the best choice you can make, we invite you to open an account and begin making use of the advanced trading platform we offer.