Are you interested to widen your knowledge about trading and the stock market? You may have already come across the term contract for differences (CFD), and you find it interesting. But what is CFD?
The contract for differences (CFD) is a contract between two parties to which they agree that the buyer will be a partial owner of stocks. Moreover, this agreement includes the buyer’s profit which will come from the difference between the closing the opening price of the underlying assets.
It looks pretty simple, isn’t it? That’s why it’s considered a good alternative to traditional trading. So if you’re getting more interested, here are some of the benefits of contract for differences (CFD) trading!
1. Wide range of trading opportunities
When you opt for CFD, you have a wide range of trading opportunities. Nowadays, sellers offer assets including commodities, currencies, and indices. Furthermore, you can also have the option to trade worldwide, regional, and national.
Of course, you might think that if you trade for a lot of markets, you’ll need to have access to different platforms. Fortunately, you are currently entitled to trade with just using one account. Additionally, you’re not required to day trade. Instead, you can just create a strategy that will give you advantages while trading.
If you want to be well-informed about the content of a CFD, then you should discuss it with your broker.
2. Traded on margin
As mentioned before, CFD is traded on margin. It means that you’re just going to pay for a position of the share or stock instead of paying for the full price. So if you’re planning to invest in CFDs, you don’t need much money. Basically, the margin is the partial amount you’re going to pay.
However, some brokers or sellers tend to require buyers to maintain a specific amount of balances before they let them transact.
The margin rate will depend on the market and the broker. So if you’re looking for a specific rate, you should look for a broker that can help you adjust. Meanwhile, you should also know how the market works to give you a clearer view.
3. Higher leverage
Leverage is simply the act when an investor pays less than the full amount of investment. Since it’s one of the best features of CFD, you can get higher leverage in it compared to traditional trading.
Nowadays, the minimum margin requirement when trading for CFDs can be as long as 2%. This means that you’ll invest less, but the return can be as high as possible. Unfortunately, losses can also be magnified as leverage increases.
On the other hand, if you invest in traditional trading, you’ll need to pay the full price of the position. This means that you’ll be investing a lot of money so you’ll lose more if things go bad.
4. Can benefit from rising and fall of assets
When you go short, you can choose to sell multiple contracts you’re in. In doing so, you can still profit even if the market is falling. Once the market rises, then you can buy the contracts again. It’ll prevent you from the hassle of finding new opportunities.
On the other hand, you can also buy long. It means you’ll be able to get a hold of the position for a longer time to gain profit.
If you’re wondering about the difficulty of selling or buying, then you shouldn’t. Since you’re just going to buy or sell a contract, your investment is still partial.
5. Manageable risks
If you play your cards right, you can easily manage the risks of having losses. However, the risks you can manage only apply when you’re doing the actual things. Once you get to know the world of CFD and how it works, it’ll be easier for you to gain profit.
Meanwhile, the risk comes when you’re just a beginner since you’re not sure about the broker, the regulations, and the market you’ll pick. So be careful on that part as worldwide CFDs can’t easily be tracked.
It’s also the main reason why there are specific CFD markets are banned in the United States. However, there are also other options if you would like to pursue it.
Trading, whether traditional or via CFD, can be too hard at the beginning. So if you want to grasp everything, it’s necessary to learn all the facts and information and practise trading more often. That way, you know the technicalities and the actual process once you start the real deal. Moreover, when you get started, try to invest as minimal as possible at first so you don’t get disappointed when you lose.
Now that you know the basic benefits you can get when you opt for contract for differences (CFD) trading, then you can start practising. Don’t forget to share your CFD trading journey by leaving a comment below!