CFD Trading stands for ‘Contracts for Difference’ Trading. It is the activity of trading these contracts with a broker. With CFD Trading, you do not trade in assets, but ‘contracts’, a derivative product based on a contract between a buyer and seller and the difference between assets starting value and closing value, within a certain time frame.
How does CFD trading works?
The contract between the buyer and the seller specifies that the seller will pay the buyer the difference between the current value of the asset in question and its value at the time the contract ends. This means that should the value of an asset fall and the value difference is negative, then the buyer must pay the seller.
This allows traders to take advantage of both values increasing, called a Long Position, and decreasing values – a Short Position. So, depending on whether the trader predicts the value of the asset will increase or decrease, they will be the buyer or seller respectively.
What are the Benefits while trade in CFD?
There are many benefits to CFD Trading, and it has gained popularity since it began in the 1990s.
- Lower Capital Requirements: This has opened up the market to more traders with less capital they are willing or able to invest.
- Allows anyone to exercise their right to earn from asset movement, rather than the asset itself.
- As you can invest smaller amounts, this can be perceived as a less risky way of trading.
- In some countries – like the UK – there is no stamp duty on CFDs, as they are derivative products.
As with all kinds of trading, there is risk associated with CFD Trading. Earnings are based on correct predictions and should the value of the asset in question move in the opposite direction, you stand to lose your whole investment.