Contract for Differences (CFDs) are one of the more popular derivatives in the financial world. That being the case, there are still many who do not understand how CFDs work, or even what they are used for.
As the name suggests, a CFD is a contract between two parties to exchange the difference between the price of an asset from its opening position to its closing position.
Since CFDs obtain their value from the underlying asset that they are tracking, they are considered a type of derivative.
CFDs are a type of leveraged product. You put up an initial sum of capital and your CFD provider allows you to take up a much bigger market exposure.
One of the reasons behind why people are sometimes confused over what CFDs are is because CFDs can be used for different types of asset classes.
For example, Tradex’ services, allows clients to use CFDs across a wide range of asset classes such as shares, indices, foreign exchange and commodities. That means even while the concept of CFDs applies equally across different assets (i.e. you pay the difference between the price at opening position and the closing position), the underlying assets that determine the value and volatility of the CFDs are drastically different.
Traders and investors can use CFDs to get the exposure that they are looking for in the financial markets. They also need to have a good understanding of the underlying assets.
Leverage, bring power to your investment
Since CFDs are leveraged products that allow the holders to take up a much larger market position than the actual amount they have put up, they are popular among traders.
Generally speaking, most short-term traders are not looking to hold on to a long-term market position. Rather, they aim to make use of leverage to earn profits through short-term fluctuations in prices using their own trading methods such as technical analysis.
For example, a 1% increase in stock price would be a lot easier for a trader to capture compared to a 10% increase. With no leverage, a trader who takes up a $10,000 position would only be able to earn $100 from a trade.
With the use of a 100:1 leverage through CFDs, the same trader would be able to take up a position size of $10,000 and make $1,000 through the trade, thus giving him a 10% return. It works both ways, can magnified your profits or your losses.
CFD trading in its most basic form is no different from any other market transaction in that it involves an agreement between two parties (a buyer and a seller) to transfer a contract at a specific price and time. One common misconception about CFD trading is that money can only be made when markets are in an uptrend, but nothing could be further from the truth. Here we will outline some of the basic elements that allow CFD investors to achieve gains in both rising and falling markets.
In trading jargon, the purchase of a CFD is typically referred to as a ‘long position’ and this generally requires an expectation that the value of an asset will increase over the life of the investment contract (the CFD). In order for this purchase to be made, however, there must be a party willing to take the opposing view and sell that asset to the buyer. The selling of an asset is often referred to as a ‘short position’. One essential concept that new traders must understand is that CFD trading is flexible enough to allow for a wide variety of strategies and that traders are able to establish either long or short positions at any time, based on their individual market expectations.
Benefit from full cost transparency and find the daily CFD that fits your personal investment goal. Private investors can choose from a total of 2200 different CFDs of the following assets: