The financial world had developed tremendously alongside with technology, enabling ordinary people to get involved and profit from the price fluctuations. We now have probably the largest offer of instruments that can enable us to trade the markets, but still, many aspiring people do not manage to take advantage of them.
ETFs, CFDs, futures contracts, options and many other, are at our disposal, but as any other tool, we need to master them better. Because of that, this material will focus on CFD trading, what does it mean, why should someone trade them, advantages and disadvantaged and so forth.
Alt text: CFD trading
The basics of CFDs
A contract for difference or CFD is a derivative instrument that tracks the performance of a particular asset. In nowadays, there are CFDs for currency pairs, stocks, indices, precious metals, cryptocurrencies and many others, covering almost all the global financial markets. CFDs had become increasingly popular and most of the online brokers are using them.
Several advantages of CFDs are as follows:
- People can trade different assets with leverage, something that could not have been possible on the stock exchange, for instance. By doing that, the potential for profit increases, but also the potential for losses.
- Short-selling: you are able to profit from both rising and falling markets, a feature which is not allowed on all markets.
- No physical ownership of the underlying asset.
This type of trading instrument is suited for speculative reasons, enabling traders to profit from short-term price variations. Using CFDs for longer-term trades could have some negative implications, due to commissions some of them have attached.
There are also some negative implications towards CFD trading. Beginners must learn how to make a difference between good and bad brokers since some of them can take advantage of some weak points. Basically, an unregulated broker which happens to be a market maker as well could try different things (like stop loss hunting) in order to make its clients lose money.
Being a market maker means that the broker open positions on the other sides of the market, so when clients lose money, the company earns money, besides the commissions attached to the trading instrument.
However, trading CFDs with regulated and trustful brokers has more advantages since it enables access to the financial markets for those who are not able to invest a huge amount of money.