Perhaps you’ve heard the term CFD floating about, and you are wondering whether it is something that you should be finding more out about. After all, when you own your own business, having multiple income streams to fall back on is essential.
In this short guide, we look at what CFD trading is and some of the benefits of it.
CFD stands for contracted for difference trading. It is a form of derivative trading and enables a trader to speculate on whether the value of global financial markets or instruments will increase or drop. These may include such things as treasuries, commodities, indices, and currencies.
Generally, it is an affordable and viable alternative to more traditional forms of investing, although, like with anything, you need to understand the benefits and the downfalls to get the best out of it.
With CFD trading, you are not purchasing or selling an underlying asset. You are not buying something such a physical share in a business or any sort of commodity or currency pair. What you are doing instead is purchasing or selling a number of units for a specific instrument based on whether you think that prices will go up or down.
For example, let us assume that you are trading a CFD on gold prices. You don’t own any gold. Your contract would have a purchase and a sale price depending on the actual cost of gold at that particular time.
When you believe the market is going to increase, you would then buy it. This is known as going long. If you believe the market is going to drop, you sell it. This is known as going short. The more the market moves in the direction you are expecting, the greater the profits that you will get. The more it runs in the opposite way, the more money you lose. It really is that simple!
What Are the Benefits?
- Leverage can pump up transaction volumes to high levels, allowing for more significant gains on comparatively smaller investments. It ensures that your money will work more effectively than would otherwise have been the case. It can generate higher returns sooner than other investments would do.
- Shares similarities to the underlying market– CFD will imitate what the underlying market is doing. Purchasing a CFD share of a company is the same as acquiring a share of the company. If you want to buy 3,000 shares, you’re going to have 3,000 shared CFDs. If you decide to trade your CFD shares, your position will be changed to account for the impact of dividend payments.
- The ability to trade in a wide range of markets–CFDs allow you to trade in over 16,000 markets. These include cryptocurrencies, commodities, Forex, indices, and more. One of the great things is that you don’t need to have access to multiple platforms in order to be able to trade in different markets. You can even trade during market hours, enabling you to take advantage of off-hour volatility in the value of the stock or currency.