What does CFD stand for? It means contract for difference. Trading CFD lets you take a spot on the instrument’s value even without actually owning the fundamental asset.
One of the most exceptional features of CFDs is that they will let you earn from the falling markets so with the increasing ones.
As an introduction to CFD trading, this article will teach you what CFDs are, and the risks and benefits of trading them. You will also learn about the leverage and how to use it. Lastly, you will know what makes it famous.
As the name suggests, CFDs create a contract between two participants on the asset price’s movement.
The list below reveals some of the key elements of the CFDs that make them exceptional and exciting products.
CFDs are Derivatives Products
This basically means that you don’t have to own the fundamental asset. You are just to speculate whether the price will increase or drop. Take the example of stock investing. Say, you want to buy 10,000 shares of Barclays with the price of 280p per share.
This means that it will cost you £28,000 for the investment, excluding other fees and commission. In exchange, you will have a certificate of stock, a legal document that verifies the shares ownership.
Simply saying, you need the physical assets to be in your hands before you can actually sell them to make a profit. However, in CFDs, you don’t have to own those shares. You will just speculate and have potential profits from the movement.
CFDs are Leveraged
Since CFDs are leveraged, you will be able to gain larger exposure in the market even with small starting deposits. With leverage, your return of investment or ROI is much larger compared to other trading forms.
Going back to the Barclays example, those 10,000 shares are at 280p, will cost you £28,000, with the fees and commission not yet included. Nevertheless, in Trading CFD you just need a small portion of the total amount of trade to be able to open a position and keep the same exposure level. For instance, XTB gives you a 10% or 10:1 leverage on shares, thus you only have to deposit £2,800 for initial to begin trading the same amount.
Say, the Barclays shares increased to 380p, that means the position value is now £30,800. Thus, with a small deposit, CFD trading has made a £2,800 worth of profit. That is 100% ROI, compared to the 10% investment return to shares that were physically bought.
The important thing to recall with leverage is that while it can expand your earnings, it can also increase your losses. Thus, if the value moves in your opposite direction, you may be closed out or you need to top up your money to keep your account open. Make sure that you understand how risk management works.
Earn in Both Rising and Falling Values
If you think that the value of an asset will rise, you may go long or buy. You will earn every-time there is an increase in the price.