Contract for difference or CFD is a kind of derivative. This means it only acts as an agreement to exchanging the difference in the value of assets between the time you open a contract to the time you close it. During the trade, you don’t actually own the underlying asset; you are only speculating whether the price of that asset is falling or rising.
In today’s time when cryptocurrency is booming, more and more people can no longer recognize the difference between gambling and CFD. After all, CFD just involves betting on the market moves, right? The Financial Times have explained how cryptocurrency can affect CFD if the no one clears the difference between the two.
To understand why CFD is different from gambling, you need to go back to the basics of this trade.
What really is CFD trading?
The principle is simple. If you open a CFD position, you select a certain amount of CFDs that you like to trade. You will gain profit if the market moves in your favor.
To begin, you need to completely understand the market of your choice. Only then will you be able to make an accurate prediction. If you think that the market’s price will go up, you click buy. Then, you will gain profits when the market’s price increases. When the price falls, however, you’ll make a loss.
What markets can you trade?
There are more than 5,000 CFD markets and asset classes all over the world. Most of these allow you to use leverage and go short or long. You can trade the following:
- Indices like Wall St. and UK 100
- Shares like Amazon and Rio Tinto
- FX like JYP/USD and GBP/EUR
- Commodities like oil
- Currencies, interest rates, bonds, etc.
Why is CFD trading popular?
CFDs attract investors who want to actively participate in trading financial markets. Why? First of all, they are tax efficient as they do not require you to pay stamp duties. They are also flexible. You can trade on falling and rising markets, and you’ll still have a chance to make profits. Moreover, with a small amount of money, you can already control a market of much larger value. If you are not willing to take great risks, there are hedging tools that you can use to offset potential loss in value of your investments.
Are you qualified for CFD trading?
Though CFD trading gives you an opportunity to make better return of investment (ROI), it can be risky. The risks of CFD trading is easy to overcome for people who are active in trading.
If you are looking to make your portfolio more diverse, then you can tap into the different global markets and trade FX, shares, commodities, and indices. Insight and good decision-making are critical in CFD trading. If you’ve mastered both, it is easy to gain profits.
Trading CFDs has several key benefits. However, it is not for everybody. If you want to succeed in it, you must learn all the tricks of the trade.