Crystal Ball Markets
According tothe FCA,interest in CFD trading soared by 192 percent in 2020. If you’ve been aroundinvestment-inclined people, you might have heard them casually throw around theterm CFD. CFDs have been surging in popularity recently. As more people becomeaware of them, they wish to try their hand at CFD trading. However, before youdelve into CFD trading, you’ll want to make sure you do your due diligence. Investingyour money always requires you to be prudent. You don’t want to throw away yourhard-earned money by investing in something you don’t understand.
What are CFDs?
CFDs, an abbreviation for contracts fordifference, are heavily prevalent in the world of financial instruments. Theyare a contract between a buyer and seller for an instrument representing anasset. Usually, CFDs have stipulations stating the seller must pay thedifference in value between an underlying asset’s current price and its valueat the time of the contract. Hence, when you’re using CFDs, you’re leveraging betswithout owning the asset. CFDs don’t grant title or ownership to an underlyingasset. Instead, they only focus on the price changes between entry and exitpoints. Therefore, CFDs are an excellent tool for traders and investors to useif they want to profit from speculating on an asset’s price movement.
You can useCFDs for forex, stocks, futures, and other commodities.
Two people agreeing to a CFD
How CFDs Work
CFDs havebecome so popular because they utilize margin and leverage. The concept behindmargin and leverage is straightforward. They ensure that traders are able totrade the volume of standard contracts with a smaller amount of trading capital.Therefore, when you purchase a CFD, you don’t pay the required initial marginfor a standard contract for the underlying asset. Instead, you purchase the CFDcontract at a fraction of the capital required, depending on the leverage abroker offers. Most brokers provide leverage of 1:10, to 1:100on CFDs, depending on thecommodity or instrument. The leverage can extend to 1:500 for forex trading.
Let’s use anexample to illustrate the point. We’ll assume that you believe the stock of XYZCompany is about to rise. You would like to benefit from the price movement,but you don’t have a large amount of capital to invest in the stock. Instead ofpurchasing the stock, you can buy a CFD instead. Let’s assume the current valueof the stock is $40 per share. If you were to purchase the stock from astockbroker, they would require you to pay the entire $40 per share. In thissituation, if you wanted to purchase 100 stocks, you would have to pay $4000.However, that’s not the case with CFDs. Before you can buy CFDs, you’ll want tocheck the margin rate of XYZ Company. In this example, we’ll presume XYZCompany’s margin rate is 10 percent. As a result, you’ll only have to pay 10percent to buy 100 CFDs. Therefore, you can buy 100 CFDs for XYZ Company for$400.
Let’s assumeyour prediction happens to be accurate. XYZ company’s stock price rises to $50.As a result, your CFDs are now worth $500. You can calculate this change bymultiplying the company’s current stock price with thevolume of contracts youbought (100). As a result, you’ve made $100 in profit by accurately predictingthe stock’s price movement. However, it would serve you well to remember thatspread and financing costs usually apply, leaving you with a slightly lowerprofit.
In thisexample, you profited by going long on a CFD. Going long refers to investing ina CFD that you believe is going to increase. You can also profit from bettingon a CFD that’s about to go down. Most people refer to that as going short.
Advantages of Trading CFDs
There aremany advantages to trading CFDs, which is why they’re becoming so widespread.These advantages include:
Leverage Effect
Since CFDtrading works on margins and leverage, you can utilize your investment capitalwisely. Leverage allows investors with little capital to still make profitabletrades. You can benefit from opening positions that are much larger than youraccount size. Since most CFD brokersoffer anything from a 1:10 to 1:100leverage, you can hold a larger position. For instance, on a 1:2o leverage, youcan trade a contract volume worth $20,000 with just $1,000 in your account.
Range of Markets
Anotherthing that makes CFDs so popular is their versatility. You can trade CFDsacross a range of markets. They are applicable for nearly every financialinstrument. Therefore, it doesn’t matter whether you’re interested in stocks,indices, cryptocurrencies, or commodities. You can still utilize CFDs to speculateand benefit from price movements.
Not Owning an Asset
CFDs alsoenable you to benefit from trades without having physical ownership of anasset. Many people will consider this a disadvantage. However, if you inspectit closely, you’ll realize the value CFDs bring. Since you don’t own an asset,you’re reducing your investment risk. In addition, CFDs enhance your liquiditysince you don’t have to worry about finding a buyer or a seller for your underlyingasset. This can easily be contrasted against certain physical commodity futuresthat require physical delivery at settlement dates, which may be less suitablefor speculators.
Minimal Fees
AlthoughCFDs have fees such as spread and financing costs, they’re minimal compared towhat a stockbroker or a commodity exchange will charge you. Hence, you don’thave to worry about covering additional expenses that would typically arise intraditional trading.
Countries Where You Can Trade CFDs
Unfortunately,regulations around CFDs vary from country to country. In the United States, theSecurities and Exchange Commission has restricted the trade of CFDs.Therefore, you can’t use CFD contracts. However, if you’re a non-resident, youcan trade using CFDs. Most European countries allow CFD trading in listedover-the-counter(OTC) markets offered by brokers. Nations like the UnitedKingdom, Germany, France, Sweden, Norway, Italy, Belgium, Denmark, and the Netherlandsallow CFD trading. In addition to these European countries, some non-Europeancountries also permit CFD trading. These include Thailand, Singapore, SouthAfrica, New Zealand, Hong Kong, and many more.
Trading CFDs Online with Crystal Ball Markets
If you’reinterested in CFDs trading, you’ll need an online CFD broker or an online CFDtrading platform. In such an instance, we can assist you. Crystal Ball Marketsis one of the best brokers for CFD trading. In addition, we also have toolsthat aid you with CFD market analysis. Our tools and resources facilitate your CFDonline trades, improving your odds at profitability. You can use our platformto trade or invest in indices CFD, cryptocurrency CFDs, or do CFD stocks/ sharestrading. Visit our website today for more information.Alternatively, register with us to get started.
