Contracts for Difference have become popular amongst brokers as an over the counter financial derivative product. These CFDs enable the broker to trade on various financial assets include Commodity Futures, Shares, Indices Futures, Cryptocurrency and Exchange Traded Funds. It essentially gives brokers the ability to trade freely without having any obligations or owning the CFD directly. This way, there is more flexibility when it comes to trading. CFD Brokers only want to trade if the financial instrument they’ve selected is likely to rise in value. Those brokers that have any financial asset traded become weakened in value, and then the loss will be determined by how much the brokers sell their stock and how much they paid for it initially.
The brokers use numerous trading strategies to advance their contracts for Difference. Unskilled traders need to learn these trading methods and master the differences between Long Vs Short Positions. The long position is when a CFD Broker purchases an asset that they believe will rise over a long period, which allows for a higher level of flexibility when it comes time to sell the contract.
The short position is when brokers feel that the contract will decline in asset value in a short period. However, in short positions, brokers can opt to repurchase the contract. If a trader’s prediction is incorrect and the assets of the contract continuously rise, they can purchase the contract again but will sustain a loss. This loss is determined by the opening and closing price of the traded asset throughout its lifetime with that broker. Financial costs are often more expensive when buying in a short position.
Why CFD trading is unique
- Zero Exchange Fees – Traders don’t directly own the contract for different and don’t acquire any of the necessary rights that come with the underlying asset. The contract is explicitly held with the exchange.
- Leverage Trading – In comparison to the CFD Underlying Asset, brokers need a low amount of capital to open a trade. Leveraging is like a double-edged sword; it can increase losses but also increase gains.
- Stamp Duty – The majority of contracts for Difference aren’t subjected to stamp duties. However, this can change depending on your jurisdiction or personal circumstances.
- Multi-Instrument Investment – Brokers that trade with multi-instrument investments are using multiple trading instruments on a single platform.
- Trading on Rising & Falling Markets – Depending on the market conditions and your strategy towards trading, opening a position that is long-term or short-term.
- No Expiration Date – Typically, the idea of the contracts for Difference is that when there is a rise in assets, there will inevitably be a fall in assets. This allows for contracts for never cycle and for there to be a continuous market cycle.
- Hedging Abilities – Hedging acts as a buffer for brokers trading on CFD’s. If the contract isn’t going in the anticipated direction, you can purchase an additional contract going in the opposite direction.