CFD trading is not just popular because it is a leveraged instrument but also because it allows the traders to speculate in the market and profit in the rise and fall of prices. What is CFD? How does CFD work? CFD stands for Contract For Difference. It is a well-known financial derivative that allows easy trading of price movements of the underlying asset. In the midst of the buyer and the seller is a contract stating that one party has to pay the difference between the opening and closing price. Traders also have the freedom to decide the time to enter a contract and also the time to exit it. They are also allowed to decide on the volume of contracts and the number that they want to trade-in.
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The only thing that traders cannot control in CFD is the movement of the price which is determined by the price movement of the underlying asset.
Going Long and Going Short in CFD Trading
When trading CFD, traders are allowed to speculate on different instruments from various classes. When you buy a CFD, you are predicting that the price of the underlying asset will rise. Similarly speaking, traders can also short-sell if they think that there will be a fall in the market price of their underlying asset.
Traders Don’t Own the Underlying Asset
Another characteristic of contracts for difference is the inability of the trader to own the underlying asset. Buying something through CFD, you can use leverage. With leverage, you will only pay a small margin or the deposit to open an account and start trading. But, you must also understand that CFD is totally different from stocks trading where you own the underlying asset as long as you paid for the full. In CFD, it mimics the characteristics of stock trading where they can trade in a larger position minus the huge deposit.
Leverage Made CFD So Popular
As mentioned above, leverage plays an important role in the immense popularity of CFD trading all across new and experienced traders.
With leverage, you are allowed to open and even control a much larger position than what you can really afford. That’s something commendable and what every trader with a tight budget needs. But leverage must not be taken lightly as this also has the power to ruin your entire trading fund including your initial deposit. Different CFD brokers offer different leverage. Just remember not to overuse leverage to keep the risks at a minimum.
Range of Markets To Choose From
If you are interested in multiple markets aside from Forex, then you definitely have a wide range of options to choose from in CFD. Some of the financial markets that are offered in CFD include commodities, bonds, stocks, cryptocurrencies, and stock indices.
Trading CFD is even made easy, thanks to online trading. You just have to open a brokerage account to be provided by your CFD broker and you can start trading. It’s that simple. Other than that, you need continuous education about the market you’re interested in to broaden your chance of obtaining profits.