CFD Trading – Why Should You Trade CFDs?

CFD Trading - Why Should You Trade CFDs?

CFD Trading means trading Contracts for Difference. Here are what CFD trading is all about and various reasons why you should get started today.

What are CFDs all about?

Popular financial products known as CFDs are essential elements of trading. It might be challenging to properly comprehend the benefits and drawbacks of trading in CFDs, especially for traders who are just beginning their trading careers.

In this article, we’ll be looking at trading CFDs objectively, providing you with all the details you need to decide if it’s the best type of trading instrument for you and how these assets can be modified to fit your trading style.

Understanding CFDs

Contract for Difference, or CFD, is a sort of trading and a well-liked entry point for traders into the financial markets. Brokers for popular instruments including forex, commodities, and stocks provide them. CFD trading is a type of derivative trading where the movement of an underlying asset determines its value. They allow traders to trade price changes without really owning the underlying asset.

What is CFD Trading?

Trading CFDs indicates that a contract between the trader and the broker has been initiated. A contract that speculates on the price of an asset under market conditions, where the trader—the “buyer”—and the broker—the “seller”—agree to some terms. With these contracts, CFD traders can avoid some of the drawbacks and costs of traditional trading & investing because they do not own the underlying asset.

How do CFD contracts work?

In essence, the price difference between the entry and exit dates of a contract is used to compute profit and loss. This means that the broker—also known as the “seller”—who enters into this contract with you will pay you the difference between the contract’s starting and ending prices if it ends in a profit. The trader, often known as the “buyer,” is responsible for paying the broker if the trade ends in a loss.

Calculating Profit and Loss in CFD Trading

The difference between the price at which you enter and the price at which you exit, multiplied by the quantity of CFD units (called lot size in most cases), is the crucial calculation to determine your profit or loss. There are many different markets where CFDs can be purchased. CFD traders can select from CFDs on forex, equities (stocks), indices, commodities, and many more, depending on what their brokers offer.

Why Should You Trade CFDs?

Ability to Go Long or Short

Because a CFD trade consists of an agreement to based on the difference between the opening and closing price of your position, it is more flexible than other forms of trading. This allows you to trade on markets that are heading down (short/sell) as well as up (long/buy).

When you trade CFDs, you’ll see two prices listed: the buy price and the sell price. You enter a long/buy trade if you think that the market is going to go up in price, and a short/sell trade if you think it is going to go down in price.

Leverage

Your investment capital can go further with leverage CFDs because you only need to put up a small portion of the total value of your transaction to create a position. You’ll need to make a deposit known as a margin. The size of your position and the margin requirement for your preferred market will determine how much you must deposit.

A position worth $1000 may only require a deposit of $10 if your broker has a 100x leverage, in which case your margin would be 1% of the total exposure of your trade. It’s crucial to keep in mind that your final profit or loss is determined by the size of your position as a whole, not just your initial deposit.

Range of Markets to Trade

CFDs give you a whole range of markets to trade, including shares (stocks), indices, commodities, currency (forex), cryptocurrencies, options, and more, depending on what your broker offers. Additionally, you can trade on many markets with one broker without having to access multiple platforms/accounts. Anywhere you need it, everything is accessible with a single login; you can trade using a computer browser, a phone, or a tablet.

CFDs are Very Similar to their Underlying Markets

CFDs are made to reasonably nearly resemble the trading environment of their underlying market. If you wish to purchase the equivalent of 2000 Apple shares, you would purchase 2000 Apple share CFDs. For example, purchasing an Apple share CFD is comparable to purchasing a single share of Apple. However, you won’t enjoy shareholder rights when trading share CFDs because your holdings will be changed to counteract the impact of any dividend payments.

 

In contrast, purchasing or selling a forex CFD entails purchasing a specified quantity of base currency by selling a corresponding amount of quote currency. Therefore, purchasing a single GBP/USD CFD would expose you to the same risk as purchasing £100,000 in US dollars.

Risk Management (Stop Loss & Take Profit Orders)

Most CFD brokers offer Stop Loss & Take Profit orders which are very good for managing risk and money. “Stop loss” involves setting an order for your broker to close your trade at a certain point in order not to incur more loss on the trade in an event of a downside, while “Take profit” involves an order to close your trade at some certain point to secure some profit.

Our Recommended CFD Brokers

Forex & Commodity CFD Trading – FXTM

If you are looking to trade CFDs in Forex (like EURUSD) or Commodities (like Gold), then FXTM is our recommended brokerage for those.

FXTM is a global leader in online financial trading and investing, offering Forex, commodities, and more. Established in 2011, the FXTM brand is a global leader in online trading, bringing the opportunities of financial markets to global audiences.

FXTM is a leading forex and CFD broker. Offering a huge range of markets and 6 account types, they cater to all levels of traders.

Start Trading with FXTM today!

Stock & Indices CFD Trading – Exness

If you are looking to trade CFDs in Stocks (like Apple and Amazon) or Indices (like US500), then Exness is our recommended brokerage for those.

Exness is an international, award-winning retail broker founded in 2008. Exness is a Securities Intermediary registered in Curaçao and authorized by the Central Bank of Curaçao and Sint Maarten. With Exness you enjoy some of the best trading conditions in the market with order execution as fast as 0.1 seconds, swift deposits, and withdrawals.

Start Trading with Exness today!

Conclusion

Lower margin requirements, simple access to international markets, the absence of shorting restrictions, and minimal or no fees are benefits of CFD trading. But high leverage increases losses, so ensure you are applying proper risk management when trading CFDs.

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