19 March 2020, FXTM - CFD trading stands for Contract for Differences which is a financial contract that pays the difference between opening value and closing value of an asset in a transaction or it is making a profit from the movement of the stock price instead of investing in that stock. This allows investors to trade in the securities’ direction which is short-term and popular securities, especially in stocks, commodities, indices or currencies. CFD traders can forecast prices and fluctuations.
The trader who speculates the price higher will buy the CFD while the trader who speculates in the opposite direction will open in the opposite position as well. Online CFD trading gives an option for investors to trade by themselves. Also, there is no clear enforceable law. So, other people can trade freely as well.
Advantages of CFD trading
- Allow investors to trade price action of assets, including ETFs, indices, stocks, and commodities in advance.
- Provide investors the benefits and risks as the owner of the securities without being the owner. This is another way to spread the risk to investors which allows CFD trading to be very popular worldwide.
- Use Leverage. Leverage is using the ratio of virtual capital with the market value which is quite high such as gold 1:100 and silver 1:5000. Besides, it is a useful tool to help traders increase their purchasing power. By the way, the traders should be aware that leverage can increase losses as well. This method allows investors to deposit a small amount of their trading volume with a broker.
- Normally, there are few rules and regulations of the CFD market compared to general exchanges. Therefore, CFD trading uses low investment funds, including money in securities accounts. This also allows investors to use short or long positions or buy or sell.
- Most CFD brokers will offer products in key markets around the world. So, it brings good benefits for traders who can easily access all markets from their brokers’ platforms. Today, there are many brokers who can support CFD trading which allows investors to have more trading options as well.
Disadvantages of CFD Trading
- Although leverage can help investors make huge profits, it can also cause enormous losses.
- High fluctuation or volatility can lead to a wide spread between Bid and Ask prices from brokers.
- Investors who tend to losses will be able to receive margin calls from brokers to make additional deposits.
CFD trading allows traders direct access to liquid pricing and receive live data from NYSE and NASDAQ. They are also able to trade with no limited hours for 24 hours, 5 days a week. For this reason, this is an interesting option for those who want to diversify their investment.