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What Are CFDs?

Contract for difference (CFD) trading has become popular in recent years as it gives traders a powerful and very flexible way to diversify their portfolios. Read on to find out more.

What is CFD Trading?

A CFD is an agreement between two parties to exchange the difference between the opening and closing price of the contract. This involves speculation on the price movement of an asset without the asset itself being bought. The markets that allow for this type of transaction to take place include currencies, bonds, commodities, indices and shares.

How Does CFD Trading Occur?

CFD trading requires a trader to take a position on an underlying asset by buying or selling units. Then, when the price of the asset moves, the trader will either make a profit or a loss. For example, if the trader believes that an asset’s price will rise, the trader will choose to buy CFDs. If the price does in fact rise, the trader’s profits will rise. However, if the price falls, the trader will make a loss.

What are CFDs Used for?

Many investors choose CFD trading as a way of diversifying their portfolios and hedging against the risk which may exist in other forms of investment. Other traders select CFD trading as a primary component of their trading strategies, taking advantage of its many benefits. The choice is up to the individual investor.

What are the Benefits of CFDs?

Traders who choose contracts for difference do so for reasons which include:

High leverage, which means that positions can be taken that exceed the amount in a trader’s account;

Going short or long, which means that traders can profit from price increases or decreases.

No commission, because the price of the trade is usually built into the spread, which is the difference between the opening and closing amount;

Trading night and day, because CFDs can be traded for multiple markets around the world, allowing traders to pick and choose when they want to operate;

A variety of trading options, as CFDs are available for markets ranging from commodities to indices;

No need to purchase any stock, as a CFD involves the taking up of a position on the price movement of an underlying asset.

Choosing CFD Trading

To find out more about what you need to open a CFD trading account with us, or to discover the benefits of our flexible and powerful trading platform, please get in touch using the contact details below.