Over the years investors have had several opportunities to indulge in innovative trading in a number of new markets. From binary options to spread betting and CFD trading, there are numerous options for investors who can also use some as hedging strategies. Contract for Difference or CFD is a derivative product which allows you to trade movements in market price without the need to own the underlying instrument. Like many other types of trading CFDs are used to speculate the future movement of market prices of underlying assets.
A convenient way to trade
For the most part a CFD is an agreement between two parties to exchange the difference between the opening and closing price of a contract. The gain or loss is determined by the difference in the value and then multiplied by the number of CFDs bought or sold. One of the major benefits of CFD trading is that you don’t have to take physical possession of the asset while you gain exposure to thousands of markets you may have never had access to before. This includes shares, currencies, indices, commodities and much more. In addition, you get to profit from trade even in a falling market. As a trader you speculate on the price of underlying asset just like in traditional share trading.
The numerous benefits of CFDs
Another major benefit of CFDs is that you use it to maximize returns on your investment capital with margin leverage. Since CFDs are leveraged products you only pay a fraction of the total value of the contract which varies from 1.5% to 15% or more between brokers. There are also tax benefits while you have access to a variety of markets and asset classes. It doesn’t matter if the market is bullish or bearish, you can still trade successfully. In a rising market there is the potential to make significant profits from buying or long positions. Alternatively, you can sell (short positions) when the markets are down. By using stop-loss orders you can limit any losses by setting a loss threshold which is a predetermined level at which your trade will be closed if the price of your underlying asset moves in the opposite direction of your trade. In this way, favorable trades can be allowed to continue as well. Several brokers such as InterTrader.com allow stop-loss orders on all types of CFDs.
Choosing a reliable CFD broker
There are many factors to be considered before you open a CFD account and begin trading. Getting started is easy, however, it is important to weigh the pros and cons so that you are well prepared prior to investing real money in CFDs. Several brokers offer a wide variety of options to suit individual needs. It would be prudent to open a demo account that simulates live trading and learn to implement strategies prior to funding a live account. It is essential to choose the right CFD broker to open an account with. There are several factors to be considered before you select one. This includes the commissions charged for each trade while they ought to have sufficient liquidity to enable a smooth trade. Make sure their trading platform is reliable and easy to use. Choose a broker that offers a variety of assets such as currency pairs, indices, commodities, and equities such as FTSE 100 companies and DAX companies. Another important aspect is the accreditation held by the broker. Brokers vary in their CFD margin requirements in addition to the interest chard for long positions held overnight.
CFDs are a flexible alternative to trading price movements in the market since you can benefit from a rising as well as a falling market. If you believe that the value of an underlying asset will experience a loss in the short term you can use CFDs to sell it immediately and increase your profits in line with any fall. You can also short sell to hedge your portfolio if you believe it may lose some value. For example, if you hold $1000 worth Texaco shares, you can sell the equivalent of $1000 worth of Texaco shares through CFD trading. If the price falls by 5%, the gain from the short sell of your CFD trade will offset the loss in value of your share portfolio. In a volatile market, CFDs can prove to be more useful in terms of hedging as well.