A contract for difference (CFD) is an agreement between a buyer and a seller, whereby the seller agrees to pay the buyer the difference between the current value of an asset and its value at the time the contract was initiated. CFDs provide traders with the opportunity to generate income based on price movements in assets, all without the need to possess the underlying instruments themselves. When trading CFDs, the focus is solely on the price change between the entry and exit points of the trade, disregarding the intrinsic value of the asset.
CFD trading has gained significant popularity among online traders as an increasingly preferred option. It offers the convenience of trading from the comfort of one's home using a broker's platform, allowing for flexibility and accessibility. Traders can also take advantage of flexible leverage, which has the potential to magnify both profits and losses.
IronFX stands out as a reputable online brokerage company, recognised for its provision of CFD trading services. Traders can trade along a diverse selection of markets through IronFX, encompassing stocks, indices, commodities, cryptocurrencies, and various other options.
This article aims to delve into the benefits of trading CFDs with IronFX, offering insights into its core features and the advantages it brings to traders.
Advantages of CFD Trading
Discover below some of the key benefits associated with CFD trading.
Enhanced Leverage
CFDs offer higher leverage compared to traditional trading methods. The level of leverage available in the CFD market varies depending on regulations, typically ranging from 3% to 50% (30:1 to 2:1). Different brokers may provide varying leverage options. Increased leverage allows traders to utilize less capital while potentially achieving greater returns. However, it is essential to note that leverage can also amplify losses.
In traditional investments, traders are required to use 100% of their capital to execute trades. In CFD trading, if the margin requirement is, for instance, 5%, a smaller amount of capital is needed to open a position, providing more opportunities for potential profit. For a $2,000 position, only $100 may be required as an initial investment, leaving the remaining capital available for other positions. It is crucial to exercise caution as leverage involves risks.
Lower Transaction Costs
Similar to traditional brokers, CFD brokers offer features such as stops, limits, and other order types. However, compared to conventional trading methods, CFD brokerage fees are generally more cost-effective. Some brokers may charge fees for guaranteed stops, while others generate revenue through spreads, commissions, or additional charges. Traders pay the ask price when buying an asset and the bid price when selling, with the difference between the two prices known as the spread. The spread changes depending on how volatile an asset is. It is advisable to review a broker's fee structure before opening a trading account.
Absence of Shorting or Day Trading Restrictions
Certain markets impose rules that restrict shorting, requiring traders to borrow the asset before engaging in short selling.
Additionally, specific markets may have margin requirements for short or long positions. In CFD trading, traders can short sell assets without the need to borrow them since they do not physically own the instruments. Furthermore, CFDs eliminate minimum capital requirements for day trading in certain markets, granting traders the freedom to engage in day trading if they wish.
Global Market Access & Diverse Opportunities
Traders have access to a wide range of products offered by CFD brokers across major global markets, enabling them to trade around the clock. Brokers typically offer indices, stocks, currencies, and commodity CFDs, providing traders with diverse opportunities and alternative paths to traditional exchanges. CFDs do not depreciate over time and do not have expiration dates, offering more flexibility compared to other investment types like futures contracts. This feature benefits long-term traders who can patiently explore the market and wait for the opportune moment to exit their positions.
It's important for traders to conduct thorough research and consider their risk tolerance before engaging in CFD trading or any form of investment.
How do CFDs Work?
As previously mentioned, CFDs operate through an agreement between the client and the CFD broker, which involves settling the difference in the value of an asset from the contract's opening time to its closing time. The majority of professional traders employ CFD trading, which is regarded as a sophisticated method.
When trading CFDs, there is no physical delivery of goods involved. Instead, the investor does not acquire actual ownership of the underlying asset but rather seeks to generate profits based on its price movements. For instance, when trading CFDs on gold, the trader does not physically buy or sell gold but speculates on whether its price will rise or fall.
Traders base their decisions on predicting whether the price of a specific asset or security will increase or decrease. They anticipate the price movement, which can be upward or downward. Typically, if a trader buys a CFD and witnesses an increase in its price, they will aim to sell it. The difference between the buying and selling prices is reconciled, and the resulting net profit or loss from the trade is settled in the trader's trading account. The same process applies to potential net losses as well.
Markets to trade CFDs
At IronFX, you have the option to trade various types of CFDs on a diverse range of financial assets. These include forex, shares, indices, commodities, metals, and futures.
Forex: Gain access to over 80 currency pairs, including popular ones like EUR/USD, GBP/USD, and USD/JPY.
Shares: Trade CFDs based on well-known company shares such as Apple, Amazon, and Tesla.
Indices: Engage in CFD trading on global spot indices, which are derived from underlying indices like the FTSE 100, Aussie 200, or the German DAX.
Commodities: Take advantage of CFDs available for a variety of commodities, such as crude oil.
Metals: Trade CFDs on precious metals like gold, silver, palladium, or platinum.
Futures: Explore trading opportunities by engaging in CFDs on commodities, indices, or energy futures.
CFD Trading with IronFX
Trading CFDs with IronFX presents traders with the chance to engage in the financial markets and potentially capitalise on price fluctuations across different assets. By grasping the fundamental aspects of CFD trading, conducting comprehensive research, implementing risk management strategies, and making use of the tools and resources available through IronFX, traders can navigate the markets with certainty. It is crucial to begin with a well-defined trading plan, effectively manage risks, and maintain discipline throughout the trading journey.
DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication