CFD trading or Contract For Difference trading is based on trading between initial and final prices of the specific asset. CFD is a popular form of derivative trading. Such way of trading allows traders to freely speculate about the growth or fall of the financial markets. CFDs can be traded with stocks, commodities, indices, currencies, and treasuries.
It is also important to note that CFD trading is very similar to Forex trading. You need to select the asset you want to trade and just like in other types of trading, if you think that the price of a certain asset will increase, you will buy it, and if you predict that the value will fall, you will sell it. The same applies to CFD trading market.
How a CFD Works?
If the stock price is $ 35.26, and traders buy 100 shares at this price, the cost of the transaction is $ 3.526. With a regular broker, using a margin of 50% trading would require at least $ 1763 in cash from a trader. However, with a CFD broker, it often takes a margin of just 5% so this trade can be purchased for only $ 176.30.
Just like in Forex or binary options trading, main advantage of CFDs is that you don’t have to possess a certain asset to trade it. For example, you can predict the value of Apple stocks without owning any. This opens the door of financial trading market to smaller investors who are not ready to pay high commissions to stock brokers, but want to experience more dynamic type of trading with smaller investments.
What is a Spread?
The difference between the purchase price and the selling price on the market is called the spread.
The purchase price will always be higher than the selling price, and the basic market price will be in the middle of these two prices, something like the average.
Advantages of trading CFDs
Also, we will list you several advantages of trading stocks based on CFDs:
- Higher Leverage – The CFD model offers much greater leverage than traditional stocks trading. The standard leverage on the market is as low as the margin requirement (2%). Depending on the assets, margin requirements can go up to 20%. Lower requirements logically mean less capital for a trader and larger potential gains. However, an increased leverage can increase your losses so you should be careful while trading
- Global Market Access from One Platform – CFD brokers offer trading on major world markets. This way of trade will certainly help traders easily access any market as long as it is open
- Execution With No Fees – The great advantage of trading with CFD brokers is the versatility of orders. Also, it is possible to cancel different trades and even have a guaranteed stop on the specific trade. Very few brokers require a commission for every trade you execute, and with traditional brokers situation is much different. CFD brokers are taking part of the percentage that is generated through the spread. Although spread is almost always fixed, volatility can affect the asset so that it can be smaller or higher.
- Day Trading Options – Certain markets and trading with a standard broker require minimum investment amounts and often limit your daily trading with different variables. However, the CFD market does not work that way. Limits do not exist, and accounts can usually be opened for at least $ 1000, even though larger amounts are also minimum.
CFDs trading is an interesting and innovative type of trading that is already taking the financial industry by the storm. Make sure to select the right broker for you and start trading with great leverage.
CFD Brokers I CFD Trading Market
Do you want to experience a new way of trading that provide you with CFD platforms? Read our article and take advantage of the services provided by popular CFD brokers