CFDs: An Exciting Way to Trade Markets - Kalkine Media

Introduction

CFD (contract for differences) trading has become more popular recently amongst retail investors. When you trade CFDs, you open up a contract between your broker and yourself that allows speculating the difference in the instrument's value between opening and closing time. Traders do not own the asset physically and are receiving profits or losses based on their analysis and price movements. For example, a trader trading CFDs on silver will not have to keep the asset physically. 

Important Features of CFD Trading

It is essential to learn the vital characteristics and features of CFD trading as it is becoming the standard way of trading financial instruments.

Leverage

CFD brokers allow traders to have a high amount of leverage that can go up to 1:200. Leverage is borrowed money that enables traders to open positions with a bigger lot size. By doing so, they can own stocks that are beyond the normal reach of their capital.

Availability of Instruments

CFD trading provides many instruments, including forex pairs (EURUSD, GBPUSD, USDJPY, etc.), indices (DAX 30, Dow Jones, Nasdaq, etc.), stocks (Amazon, Apple, Microsoft, etc.), commodities (Gold, Crude oil, etc.) and treasuries. This eliminates the hassle of searching and opening accounts at different exchanges as the instruments can be available under a single brokerage.

Trading costs

The trading costs of CFD brokerages might be built into the spreads, which is the difference between the bid and ask price of an asset. Spreads can vary differently from one broker to another. Some brokerages will not charge spreads but have their fees in the form of a fixed commission.

For example, let's consider a broker that charges fees through spreads with a bid and asks a difference of 1 pip on EURUSD. When traders buy, they do so on the bid, and the sell occurs on the asking price. The bid and the asking price for EURUSD, in this case, are 1.18720 and 1.18710, respectively. Placing a long position will take place at 1.18720, and the trader will have to cover the costs along the way.

Regulation

CFD brokers regulate themselves under notable financial authorities to improve their credibility. Generally, the brokerage will place its headquarters in the same country where it seeks out the regulation. Cyprus Exchange and Securities Commission, Financial Conduct Authority, and Australian Securities and Investment Commission are some examples of regulators.

How to Start Trading CFDs

Trading CFDs is simple and can be accomplished within three simple steps:

• Finding a broker. Traders will have to find regulated CFD brokers that offer services in their region. Make sure to check the reputation beforehand.
• Opening an account. Sign up using your email and password and provide relevant credentials to open a trading account. Some CFD brokers may require traders to verify their identity due to regulatory issues.
• Make a deposit and start trading. There are a variety of deposit methods available at noted brokerages that may include credit/debit cards, bank transfer, cryptocurrency, etc. After the funds are available in your portfolio, you can start trading.

A Few Benefits of CFD Trading

There are several benefits to trading CFDs. Some of them are listed below:

• CFD trading is best for those traders seeking a good amount of leverage and is willing to take higher risks. As using good leverage can significantly increase the position size, it also adds more risk
• This type of trading gives access to a basket of instruments under a single broker
• CFD trading allows traders to capitalize on both the long and short sides of the market
• The associated trading costs are much lower in contrast with other forms of trading
• CFD traders allow traders to hedge out of their losing positions

Author Profile

Shams Ul Zoha

Content writer and forex trader with 3+ years of experience. Aspiring to become a top-class market participant and a blogger. Immensely punctual, impartial, and deliberately considerate of my clients in the workplace. I am actively searching for opportunities to increase my knowledge of the financial industry and other departments.

Competent and swift in adapting to new concepts. A high internal locus of control allows me to self-motivate and compel myself to deliver quality articles. Good at dealing with a stressful workload, in-depth research, and bulk submissions.