A Beginner’s Guide to CFDs
According to the FCA, interest in CFD trading soared by 192 percent in 2020. If you’ve been around investment-inclined people, you might have heard them casually throw around the term CFD. CFDs have been surging in popularity recently. As more people become aware of them, they wish to try their hand at CFD trading. However, before you delve into CFD trading, you’ll want to make sure you do your due diligence. Investing your money always requires you to be prudent. You don’t want to throw away your hard-earned money by investing in something you don’t understand.
What are CFDs?
CFDs, an abbreviation for contracts for difference, are heavily prevalent in the world of financial instruments. They are a contract between a buyer and seller for an instrument representing an asset. Usually, CFDs have stipulations stating the seller must pay the difference in value between an underlying asset’s current price and its value at the time of the contract. Hence, when you’re using CFDs, you’re leveraging bets without owning the asset. CFDs don’t grant title or ownership to an underlying asset. Instead, they only focus on the price changes between entry and exit points. Therefore, CFDs are an excellent tool for traders and investors to use if they want to profit from speculating on an asset’s price movement.
You can use CFDs for forex, stocks, futures, and other commodities.
Two people agreeing to a CFD
How CFDs Work
CFDs have become so popular because they utilize margin and leverage. The concept behind margin and leverage is straightforward. They ensure that traders are able to trade the volume of standard contracts with a smaller amount of trading capital. Therefore, when you purchase a CFD, you don’t pay the required initial margin for a standard contract for the underlying asset. Instead, you purchase the CFD contract at a fraction of the capital required, depending on the leverage a broker offers. Most brokers provide leverage of 1:10, to 1:100on CFDs, depending on the commodity or instrument. The leverage can extend to 1:500 for forex trading.
Let’s use an example to illustrate the point. We’ll assume that you believe the stock of XYZ Company is about to rise. You would like to benefit from the price movement, but you don’t have a large amount of capital to invest in the stock. Instead of purchasing the stock, you can buy a CFD instead. Let’s assume the current value of the stock is $40 per share. If you were to purchase the stock from a stockbroker, they would require you to pay the entire $40 per share. In this situation, if you wanted to purchase 100 stocks, you would have to pay $4000. However, that’s not the case with CFDs. Before you can buy CFDs, you’ll want to check the margin rate of XYZ Company. In this example, we’ll presume XYZ Company’s margin rate is 10 percent. As a result, you’ll only have to pay 10 percent to buy 100 CFDs. Therefore, you can buy 100 CFDs for XYZ Company for $400.
Let’s assume your prediction happens to be accurate. XYZ company’s stock price rises to $50. As a result, your CFDs are now worth $500. You can calculate this change by multiplying the company’s current stock price with thevolume of contracts you bought (100). As a result, you’ve made $100 in profit by accurately predicting the stock’s price movement. However, it would serve you well to remember that spread and financing costs usually apply, leaving you with a slightly lower profit.
In this example, you profited by going long on a CFD. Going long refers to investing in a CFD that you believe is going to increase. You can also profit from betting on a CFD that’s about to go down. Most people refer to that as going short.
Advantages of Trading CFDs
There are many advantages to trading CFDs, which is why they’re becoming so widespread. These advantages include:
Leverage Effect
Since CFD trading works on margins and leverage, you can utilize your investment capital wisely. Leverage allows investors with little capital to still make profitable trades. You can benefit from opening positions that are much larger than your account size. Since most CFD brokersoffer anything from a 1:10 to 1:100 leverage, you can hold a larger position. For instance, on a 1:2o leverage, you can trade a contract volume worth $20,000 with just $1,000 in your account.
Range of Markets
Another thing that makes CFDs so popular is their versatility. You can trade CFDs across a range of markets. They are applicable for nearly every financial instrument. Therefore, it doesn’t matter whether you’re interested in stocks, indices, cryptocurrencies, or commodities. You can still utilize CFDs to speculate and benefit from price movements.
Not Owning an Asset
CFDs also enable you to benefit from trades without having physical ownership of an asset. Many people will consider this a disadvantage. However, if you inspect it closely, you’ll realize the value CFDs bring. Since you don’t own an asset, you’re reducing your investment risk. In addition, CFDs enhance your liquidity since you don’t have to worry about finding a buyer or a seller for your underlying asset. This can easily be contrasted against certain physical commodity futures that require physical delivery at settlement dates, which may be less suitable for speculators.
Minimal Fees
Although CFDs have fees such as spread and financing costs, they’re minimal compared to what a stockbroker or a commodity exchange will charge you. Hence, you don’t have to worry about covering additional expenses that would typically arise in traditional trading.
Countries Where You Can Trade CFDs
Unfortunately, regulations around CFDs vary from country to country. In the United States, the Securities and Exchange Commission has restricted the trade of CFDs. Therefore, you can’t use CFD contracts. However, if you’re a non-resident, you can trade using CFDs. Most European countries allow CFD trading in listed over-the-counter(OTC) markets offered by brokers. Nations like the United Kingdom, Germany, France, Sweden, Norway, Italy, Belgium, Denmark, and the Netherlands allow CFD trading. In addition to these European countries, some non-European countries also permit CFD trading. These include Thailand, Singapore, South Africa, New Zealand, Hong Kong, and many more.
Trading CFDs Online with Crystal Ball Markets
If you’re interested in CFDs trading, you’ll need an online CFD broker or an online CFD trading platform. In such an instance, we can assist you. Crystal Ball Markets is one of the best brokers for CFD trading. In addition, we also have tools that aid you with CFD market analysis. Our tools and resources facilitate your CFD online trades, improving your odds at profitability. You can use our platform to trade or invest in indices CFD, cryptocurrency CFDs, or do CFD stocks/ shares trading. Visit our website today for more information. Alternatively, register with us to get started.