CFD stands for Contract for differences. This form of trading has become more popular recently due to the range of available benefits. Traders can trade the markets on both sides and can enjoy the benefits of widespread liquidity and volatility.
A CFD contract allows investors to speculate on the instrument without owning the asset. The trader can get the difference in the price, making a profit or a loss subsequently. To understand better, let us consider an example where a market participant purchases a single lot of EURUSD at 1.21000 on a five-digit CFD broker. He won’t own EURUSD in physical form. If the pair moves to 1.22000, the benefit will be $100; consequently, if it goes to 1.20000, the deficit will be -$100.
CFD Trading: Some Important Features
CFD trading brings in some benefits for traders who can capitalize on it if they understand the subject. To get a grip on the topic, we will share some of the vital characteristics of CFD trading.
Availability of assets
CFD brokers are diverse in terms of providing multiple assets to traders. They can host stocks, indices, currencies, etc., under a single platform. Business individuals with a busy schedule can find this attractive as they do not have to jump from one exchange to another.
Executions
CFD trading permits traders to speculate the markets on both the long and short sides. There are various order types available such as stop, limit, good till canceled, etc.
Using leverage
There is a large margin available from CFD brokers that allows traders with low capital to open orders with significant size. The leverage can go up to 1:3000, which may decrease as the capital size increases. With such a substantial margin, it is also important to be careful as the risk is directly proportional to the leverage.
For example, an investor with 1:1000 leverage on their account using an initial account balance of $100 can open positions with a lot size up to 1 lot. A 10 pip move will be enough to liquidate their portfolio.
Availability of different portfolio
There are different account types that CFD brokers offer to traders. ECN, standard, etc., are a few examples. Traders with a scalping approach can find ECN exchanges with zero spread beneficial for their style, while swing or day traders can use the standerd model for trading.
Financial regulation in CFDs
CFD trading is subject to heavy financial regulation that makes sure that brokers are not cheating the investors. We can find the following regulators as trustworthy:
- The United States. National Futures Association NFA and Commodity Futures Trading Commission CFTC
- The United Kingdom. Financial Conduct Authority FCA and Prudential Regulation Authority PRA
- Australia. Australian Securities and Investment Commission ASIC
- Cyprus. Cyprus Securities and Exchange Commission CySEC
Price
CFD trading offers average cost-effective options. This can vary from one market to another, e.g., the price is much better for currencies in contrast with stocks.
Trading With a CFD Broker
Trading with a CFD broker is simple. Within a few steps, you can start executing your positions in one of the most volatile markets. To begin, traders will have to signup using their correct credentials. Many brokers may require ID verification due to regulation issues and to avoid fraud. There are multiple deposit options available such as bank transfers, cryptocurrencies, and credit cards.
Many CFD brokers offer demo account at which investors with no experience can trade without any risks. This is best for beginners as trading can be pretty tricky in the early stages. Using proper risk management, it is possible to trade efficiently using CFDs.