CFD (Contracts for Difference) trading became popular in the 1990s. In the beginning, such contracts were used to buy and sell shares, without the right to own these assets. It allowed traders to avoid payment of the so-called “stamp duty”. As for the purpose of the creation of CFD contracts, they became the response to traders with small capital. This financial instrument made it possible to trade not with the full value of the underlying asset, but with its small part. You can trade CFDs online without experience or stockbroker’s official status.
CFD is a contract, according to which the difference between the price of the underlying asset at the moment of opening a position and its price at the moment of its closure is transferred between a buyer and a seller. The contract can result in one of the following events:
- Buyer’s profit if the price of the asset has increased;
- Seller’s profit if the price has decreased.
The duration of the contract in CFD trading is usually not regulated. The contract period can be stopped upon request of one of the parties entitled to do so.
The Advantages of CFD-trading
It is also worth noting that a CFD is a derivative. It means that we are talking about purchasing and selling not a particular underlying asset, but its derivative. Interest in CFD trading is associated with low margin requirements and the ability to trade with little capital. Traders do not need large amounts of capital to buy or sell assets. Because of this, even a beginner trader can use this tool.
This method has other advantages as well:
- No commissions. The tool does not require the purchase of a physical asset. In view of this, no responsibility is imposed on the trader. There is also no stamp duty on trading CFD contracts, which is an additional saving;
- No duties. Residents of some countries may not pay any duty for trading the contracts in question. Please note that this depends first and foremost on the tax policy of the country. You should research this issue before trading;
- Constant Relevance. On any market, periods of growth are followed by pitfalls, then prices rise again. Because of this, CFD contracts always have a place in the strategy of a trader, who can keep his hand on the pulse and feel the market perfectly;
- Access to leverage. Traders with small starting capital have access to margin trading. It significantly expands investment opportunities for small deposits. It is necessary to understand that possible risks in this case also grow;
- Possibility of hedging. A contract for difference allows competently managing risks and preserving your portfolio, minimizing financial losses. For example, by selling short positions while speculating on a downtrend.
- What makes a CFD contract different from an ordinary physical asset or futures is that you can close it at any convenient time. At the same time, a futures contract can only be executed at a specific time and at a specific price.
What Can Be Traded in CFD Format?
One of the advantages of this type of trading is the ability to open positions in stocks, currencies, indices, commodities traded on the exchange, and even cryptocurrencies. This is available through one platform. Traders do not need to download many programs.
CFD trading provides access to the market of indices, including foreign ones. Trading becomes easier and less time-consuming, because the trader does not need to use the services of a stockbroker. This advantage makes it a good choice for beginners.
CFDs allow you to open both long and short positions. Both are easy to execute despite the fact that the broker often imposes additional fees on the opening of short positions in traditional stocks.