What are CFDs and what are the advantages of CFD trading?
What Are CFDs?
CFD, or Contract for Difference, is an agreement between two parties, the ‘seller’ and the ‘buyer’, to exchange the difference between the opening price and closing price of a contract. CFDs are very popular derivative products because they allow you to trade various financial instruments without owning them. CFDs trading is available in many places, including the United Kingdom, Singapore, Hong Kong, Germany, Canada, Australia, New Zealand and Japan, among others.
How to Trade CFDs?
Trading CFDs is easy. You need to open a Live Account with LiteForex and then fund your account. Choose the instrument you wish to trade, for example CFDs on Apple shares. Then decide if you think the price of the instrument will rise (place long position) or fall (place short position). For example, you think the price of Apple shares will increase, so you buy 100 CFDs on Apple shares at $450 (100*$450=$45000). The price of Apple shares increases over time to $480 (100*$480=$48000), so you decide to close your position. The profit you will make is $3000.
To help you learn how to trade CFDs you can open a Demo Account first. This way you can practice making trades, get used to the platform, and develop a trading strategy.
Advantages of CFDs:
Ability to go Long or Short
CFD trading enables you to take advantage of both falling and rising market price movements.
If you believe that a price of an instrument will go up you can open a long position. If you believe the price will go down you can open a short position. CFDs have small minimum contract sizes and are therefore the ideal way of short or long-term investment for retail traders.
Leverage or Margin
Another advantage of trading CFDs is that you can use leverage. This allows you to trade with a small amount of money and use it as a lever in order to place larger size trades. This means that you can make big profits with comparatively small investment, but the risk is also greater and losses can be made too. To help minimize eventual losses you can use different risk management tools. For example, the Stop Loss and Take Profit orders in the MetaTrader 4 and MetaTrader 5 platforms help you minimize your risk and maximize your profits.
Wide Variety of Markets
With LiteForex you can trade a wide variety of CFDs; they include CFDs on Shares, World Indices, LiteForex Indices, Precious Metals, and Oil. For example, you can trade CFDs on shares of some of the world’s largest companies, such as: Google and Coca Cola. Also, you can trade CFDs on World Indices such as S&P500, the German DAX Index, the French CAC40 Index, the Russian RTS Index and others. You can find a list of all CFDs offered by LiteForex on our website.
Trading CFDs have very low costs compared to trading and owning the underlying asset. There are no commissions when trading CFDs with LiteForex. However, a spread and swaps are applied to CFD trades. Another advantage of CFDs is that traders who use CFDs are exempt from stamp duty, thus saving a certain amount of money on the value of every trade. This is due to the fact that they buy and sell a derivative product and do not own the underlying asset.
Overall, trading CFDs has many advantages. With a single account you have access to a range of financial markets and can profit in a variety of ways. To begin trading CFDs Open a Demo Account or Live Account.