What you need to know about trading CFDs
Contracts-for-difference (CFDs) are popular trading instruments that provide investors with unique potential opportunities to profit in specific markets. This includes taking advantage of certain assets price movement, without actually owning the asset itself.
Thousands of CFDs exist, which are now a common fixture amongst brokerages' offerings. CFDs are quite simplistic, as profit is calculated as the difference between the entry point of the trade and its exit point.
Popular types of CFDs
CFDs cover virtually
every asset class, including the stock market, fixed income,
exchange-traded-funds (ETFs), cryptocurrencies, commodities, and more.
- Stocks: Investors can trade CFDs of shares of specific companies in the market. As the largest category of CFDs, traders can choose amongst thousands of popular companies without owning physical stock.
- Indices: Similar to stock CFDs, many traders prefer to trade an entire stock index such as the Nasdaq, Dow Jones, or S&P500. This is a popular option for investors who prefer a more diversified exposure into markets, unlike a specific company.
- Bonds: Many companies or governments issue bonds in exchange for funds borrowed. In particular, US Treasuries are also very commonly traded CFDs, and are impacted by a wide range of factors across financial markets.
- Commodities: The most common commodities CFDs include gold, silver, and platinum, without owning a physical metal. Investors in agricultural commodities or energy also can explore opportunities in CFDs. This differs from trading these assets across futures, which is extremely volatile and risky.
- Exchange-Traded Funds: These instruments are also traded in a similar manner as stocks but offer different exposure to markets immediately. ETFs represent combinations of financial assets put together from different classes of assets.
- Cryptocurrencies: Crypto CFDs are quickly becoming more popular as demand for cryptos increases. The advantage of using crypto CFDs such as Bitcoin means not having to utilize a crypto exchange, which carries its own risk.
Are you ready to trade CFDs?
CFDs trading presents its own advantages and disadvantages compared with other instruments. There are several factors you must consider before actually trading CFDs:
Margin Requirements
Every broker has a specific margin requirement that you must be aware of. This will affect a trader's ability to trade a specific type of CFD. Different brokers that are regulated must abide by to different leverage restrictions that clients must also adhere to.
Regulation
Possibly one of the most important things to consider is if your broker is regulated. There are countless scams and fraudulent operations out there so choosing the right broker is key. Always find out if your broker is regulated to provide CFDs, which can be located on any brokerage website.
Trading Tools on Offer
CFDs are extremely volatile so traders need to have all the information they can at their disposal. The best brokers all provide clients with several trading tools, indicators, and analytics. These are integral to the success of any trader.
This article was submitted by EuropeFX.
Risk Disclaimer: CFDs are complex instruments and
carry a high risk of losing money quickly due to leverage. 78.94% of retail
investor accounts lose money when trading CFDs with this provider. The
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