CFD stands for the contract for difference and it is an agreement made between you and your CFD broker which is meant to exchange the difference between closing and opening price of the contract. In CFD trading you don’t have to own the actual underlying assets and you can trade on just the movement of the prices. This removes the hassles of holding the assets and paying the costs associated with them. CFD trading has grown to a great popularity now and the popularity is still growing rapidly due to a good alternative for the investors looking to trade without owning actual assets.
CFDs are leveraged products which enable you to trade with less deposit which is only a small fraction of the total value of the contract. It means that you can magnify your returns on investments through leveraged CFDs. But higher leverage can result in bigger losses too due to magnified risks.
CFD trading features
You can go both long and short with CFD trading. If you feel that the market price is going higher, you can go long by buying CFDs whereas if you feel that market price will go down, you can go short by selling CFDs. CFDs are thus flexible alternatives as you can get benefited by both the rising as well as falling markets.
Hedging portfolio – CFD trading is a great way to hedge your existing portfolio and CFDs can be used to offset the potential loss due to an existing portfolio. Especially in volatile markets CFDs prove to be a good source for hedging your portfolio.
High Leverage – CFDs are traded with leverage which means that you pay only a small fraction of the total trade value and you can open a position by paying just a small value of the total value. This helps small investors a lot and they can expect good profits from the low initial capital they have. There are big CFD margins and they go as much as up to 1 percent of the total value of the trade. Thus leverage is used to magnify your return on investment as your total exposure is much more than the initial deposit needed to carry on a trade.
But high leverage also magnifies the risk to losses to the same level if the market moves against you. Therefore risk management is absolutely necessary while trading CFDs through leverage.
No stamp duty
In CFD trading you do not actually own the asset and therefore you don’t have to pay any stamp duty associated with the holding of actual asset. This may go somewhere around 0.5 percent of each trade value.
CFDs can be traded over thousands of markets
CFDs can be traded over thousands of individual markets which include shares, indices, Forex, commodities etc. and you can gain good exposure over these markets by trading on them. Those who have prior experience in any market can utilize it to trade CFDs in a more proficient manner.