Why should you trade with a CFD?
More and more private investors have taken an interest in the financial markets. Everything from forex to stock trading has caught the eye of traders, but traditional routes into trading usually require a large initial investment that puts some people off.
One of the benefits of CFD (Contract For Difference) trading is that you can trade on a position much higher than you initial investment. This is because a CFD is a geared product. You are predicting the market’s movements rather than owning any asset on the underlying markets.
This also provides you with the opportunity to benefit from market movements in both directions. Traditional trading methods, such as purchasing shares, would only benefit you if the price of the asset increased, due to you owning the asset. With CFD trading, however, you only predict the market’s movements. This allows you to potentially benefit from the falling value of an asset. However, it is important to remember that, because of the geared nature of CFD trading, the amount you could lose is also greater than conventional share trading.
The process of opening a contract helps to explain how this is possible. Prior to opening a contract, you decide as to whether you will go ‘long’, where you believe the value of the asset you’re trading on will increase, or go ‘short’, where your belief is that the value will decrease. To go short, you ‘sell’ at the bid price a CFD provider quotes to you. To go long, you ‘buy’ at the offer price and closing the contract requires the opposite action taken at the beginning. Your profit or loss margin is determined by the difference in value of the asset at the beginning of the contract compared to the end of the contract, multiplied by how many contracts you opened.
CFD trading is widely available on many of the financial markets, including forex, indices, shares, bonds and commodities. It is worth remembering, however,…