As per simple definition goes CFD or Contracts for difference can be defined as an agreement amongst parties whereby they agree to exchange the difference between opening and closing price of a contract. It is an instrument that can be used in different types of market like Foreign exchange markets and stock markets. In modern times traders use software like metatrader, which is a multi-asset trading platform, to trade in exchange or currency markets. Like for instance, applications like metatrader cfd stocks software help in trading of securities markets.
A brief overview of exchange/stock markets;
In an exchange market investors come together to execute purchase and sale of securities. These markets generally include bonds, stocks, futures etc. Here investors will generally buy and securities of listed companies depending on market conditions.
What is the difference between stocks and CFD?
There is a common misconception when it comes to differentiating shares or stocks from CFDs. You will find that Stocks and CFD are mentioned separately in computer programs like metatrader cfd stocks application or other similar platforms. This is because they both have their distinct characteristics.
A trader purchases stocks or shares of a listed company before he starts trading with them. But in the case of Contract for Difference, investors can start trading with their desired securities without even purchasing them. Using leverage, he can invest in only a fraction of total value and still get to realize proceeds from price movements of the underlying stock or security.
To illustrate this concept, here is a small example of how CFD works:
Jonathan is an active participant in the exchange market. Now, let’s say he wants to purchase shares of Google. These stocks are currently priced at $10. So, if Jonathan buys 100 shares, total amount comes to $1000. Now if he were to go through a traditional broker, he would have to dish out almost 50% of total value, owing to margins. But going through data from applications like metatrader cfd stocks analysis he chooses to use CFD to start trading. Now he can proceed with as little as 5% of the total sum.
Why CFD is more desirable when compared to stocks?
A lot of investors prefers trading with CFD over traditional stocks. This popularity of Contract for Difference can be attributed to a long list of advantages. But some of the most important characteristics that make this style of trading so practical are listed below: -
- No requirements or restrictions on Day trading
Trading in CFD generally does not come with any strict requirements. This is highly attractive for investors because in other markets you will have to have a certain amount of capital in your account to start trading. However, in CFD, you can open accounts for as little as $1000. Traders can research through software platforms like metatrader cfd stocks applications to get a better understanding.
- Options to diversify trading portfolio
Rather than just investing in shares, investors can use CFD to invest not only in securities markets but in other areas like commodity and currency.
Thus, trading in CFD helps investors to start trading in securities, commodities or currencies without putting in a huge amount of their own capital. And with advances in technology, traders can avail to use digital aids like metatrader cfd stocks trading software to maximize their profit margins.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.