CFDs (contracts for difference) are derivatives. You buy the contract and in exchange you get the price difference of the asset. The difference is calculated from when you open the position to when it is closed. The possibility to trade CFDs is nowadays highly popular among experienced traders. This is because there are some clear benefits that instantly stand out, with the main ones presented below.
Covering Numerous Markets
CFDs can be used to trade in thousands of markets, including forex, commodities, indices, cryptocurrencies, shares and much more. There is no need to access various platforms as you want to trade in different markets. Many traders love the fact that all they need is available under just one account. Trading is possible through the browser, a tablet or a smartphone. Some of the markets can even be traded outside regular hours. You can use this to take advantage of company announcements. However, remember that out-of-hours price can be different than opening price.
The Use Of Leverage
Your investment can go way further through CFDs since just a portion of the investment capital is used. The deposit is just a fraction of the full value of the trade as the position is opened. The deposit is the margin and how much is needed depends on position size, together with chosen market margin. For instance, if the margin factor of Apple Inc. is 5%, the position that is worth $10,000 just needs $500 deposit.
While using leverage can be highly advantageous, traders need to remember the fact that total loss and profit are based on full position size, not deposit size. Both losses and profits will be amplified.
Trading When The Market Goes Down
CFD trading is all about differences between closing and opening prices for the chosen position. Because of this, flexibility is much higher than with other trading options. Basically, you can make a profit in the event the market is going down, not just when it goes up.
As CFDs are traded, there are 2 prices that are listed on the platform: sell price and buy price. You will trade at buying price in the event you think market goes up. Trading at the selling price is beneficial when you think the market goes down.
Let’s say that you own some Apple shares and you want to hold them for a specific period of time. Your belief is that the technology sector is headed towards a downturn, so you will offset potential losses with the use of CFDs as you open short positions. In the event you are correct and Apple share value goes down, the CFD position gives you profit as losses are offset. If Apple shares gain value, the CFD position can be closed. In this way you offset incurred losses against the future profits.
CFDs are highly popular among experienced traders because of the benefits highlighted above, among many others. It is not at all difficult to access CFD trading and profit from what is offered, even if you do not have high trading experience. In fact, CFDs are even beneficial for beginner traders because of stability and ease-of-use.