Contracts for Difference (CFDs) represent a popular form of derivative trading that enables people to speculate on the rising or falling prices of fast-moving global financial markets. With CFDs, people have the ability to trade shares, currency pairs, commodities, indices, ETFs, cryptocurrencies and many other popular instruments that usually will be costly to trade.
Benefits of CFD trading
Trading on margin is one of the most important benefits, meaning you will only need to deposit a small percentage of the full value of the trade. The use of leverage, however, acts like a “double-edged” sword, since it has the potential to magnify your returns, or your losses, in case you won’t anticipate correctly how the market will move.
The ability to go short (selling the underlying asset) when the prices are falling or to go long (buying the underlying asset) when the prices are rising, represent another important benefit of CFDs, as they offer the potential to profit from any type of market conditions.
One can also use CFDs for hedging an existing physical portfolio, as protection against periods when the market will face corrections lower. By using CFDs, a physical portfolio’s losses during a market downturn could be balanced by CFD trading.
Almost all forex brokers regulated by ASIC have included CFDs in their offering, meaning people have a lot of different companies with different offers to choose from.
Costs involved in the process
Like with any other investment tools, CFD trading involves some costs. The most important one is the spread, which is the difference between the buy and sell price. Brokers calculate spreads based on the liquidity of a particular instrument. Popular instruments will have lower spreads, meaning the cost of trade will be smaller.
The second important cost is the holding rate, or widely known as the swap rate. It applies when traders hold their CFD position opened overnight. Swaps can be positive or negative, depending on the direction of the position and the applicable holding rate.
Commissions represent the last important cost associated with CFD trading and they generally apply when it comes to trading CFDs based on shares.
Is it worth trading CFDs?
CFD trading has both advantages and disadvantages, but with an effective trading strategy, a proper risk management model and a deep understanding of the underlying market, it could represent an opportunity that has the potential to generate returns in the long-term.