A contract for difference (CFD) is a financial instrument allowing investors to speculate on the rise and fall of the price of an underlying asset. For example, when you trade in CFDs, you don’t buy or sell shares in the company that issues them. Instead, they work by allowing you to ‘go long’ or ‘go short’.
It means that if you think that a share will increase in value, then buying the CFD will allow you to make money out of it.
This trading system is one of the most useful, powerful and versatile trading tools available to traders today.
The CFD Trading System helps traders take advantage of price fluctuations in many different share markets around the world without purchasing the actual product or asset that is being traded.
There are two types of CFDs you can trade.
The first type, known as cash-settled CFDs, is based on the exact price movement of an asset’s underlying market.
If a trader was looking to profit from a rise/fall in the value or price of Apple shares, then they could trade an Irish-listed CFD which tracks the same percentage move in Apple’s share price*.
It is different to the second type, which is physically-settled CFDs.
These can invest in asset classes like oil, metals or currencies. So traders will never actually own the underlying commodity itself – but they will gain exposure to it through their trading investment.
The benefits of trading CFDs include
- The System is less risky than owning stocks because you take on only a tiny percentage of the value of the actual share (aka Margin) at any one time.
- You can trade who you want when you want – no broker is calling you to tell you that your stop order was triggered at 10 am sharp.
- You don’t need collateral to open up an account with many brokers*, just the minimum deposit amount required by them – often as little as $1,000.
- You can take advantage of rising and falling prices wherever the market is open, 24 hours a day.
- CFD trading offers another benefit that other investment types don’t – any leftover gain on your trade gets reinvested into the next one.
- You could buy shares in Apple at $160/share & then sell them at $170/share, so you’d pocket an initial $10/share profit.
But, if you were to use CFDs instead of buying actual stock each time, every dollar gain on your profitable trades would get automatically reinvested into your next trade.
So, theoretically, you could keep increasing your overall account balance indefinitely. The benefits are clear in providing traders greater control in their investments and greater flexibility, but there are some drawbacks to trading CFDs.
One is that you don’t own the underlying asset you’re trading (which gives them their advantage). Still, there’s also a general misconception that CFD trading involves high risk, and this can cause inexperienced traders to shy away from it.
However, trading CFDs should always be seen as an investment. It should be approached the same way as other types of investments and traded accordingly (i.e., not speculatively).
In conclusion
If you decide to trade CFDs, make sure your broker* offers its clients 24-hour live support, which includes online chat or telephone support, so that if something goes wrong. Your stop-loss order isn’t triggered accidentally.
Another point to remember is that the value of your CFD investment can go down as well as up, so always make sure you know what will happen in the event of a margin call*. If you decide to trade CFDs, I hope you have success.
Certain restrictions apply when trading CFDs. Please check with your broker before opening an account.
As always, never risk more than you can afford to lose. Certain restrictions apply when trading CFDs. Ask your broker for further details and read the complete Financial Services Guide.
Check with your broker for margin call details. CFDs are not suitable for everyone. Please ensure you fully understand the risks involved and seek independent advice if necessary before investing in CFDs or any other financial products.
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