Originating back in 1990, Contract for Difference (CFD) saw a massive fame since the beginning of 2000. Although, primarily having an inception in London, CFD quickly spread all around the world and now can be found in approximately 30 countries.
However, CFD trading is not allowed in the US owing to its strict rules governing over-the-counter trading and also no registered exchange offering them. United Kingdom, Australia, Germany, Israel, South Africa, Russia, Switzerland, Sweden, New Zealand, Norway, Canada, and others are some of the countries which allow CFD trading.
Here are a few CFD trading basics which can benefit a beginner and which most of these countries follow.
Through a CFD, an investor settles the difference of the initial price and current price of an underlying asset. The contract takes place between an investor and broker where the former speculates whether the price of the asset will go up or down.
One of the prime advantages of CFD is that it can be done with multiple assets like Forex, indices, stocks, and commodities.
Similar to Forex trading, CFD also involves leverage and hence showcases significant advantages. With leverage, a trader can buy a large position by investing a small amount of money. For example, a leverage of 1:100 enables a trader to secure a position worth $100,000 by investing only $1,000.
Leverages depend on the broker and the higher leverage means the higher profit. However, higher leverage will also mean comparatively higher risks which can attract larger losses.
Owing to the benefit of leverage, many a trader buy CFD other than shares. For example, a trader wants to buy shares in company A. Price of each share is $10 and he/she decides to buy $100 of them therefore making the total value $1000. However, with a leverage of 1:10, the trader can buy the entire $1000 worth of shares just by investing $100.
One of the CFD trading basics which individuals can find beneficial is that it doesn’t come with an expiry. Although an instrument, traders can hold a position for as long as they want to.
With CFD, investors can capitalize on whether the price of an asset will go down or go up. For example, John thinks the price of shares of company A will go up in the future. He sets up a contract with his broker and according to his speculations and thereby makes a profit.
Again, John can also make a CFD if he thinks the price of the shares of company A may go down in the future. He buys a position and according to his speculations the price does go down. The difference between initial price and now the lower price is his profit which gets settled in cash.
Another CFD trading basics for beginners is the ability to invest in more than one asset. Apart from trading in all major currency pairs, traders can also invest in commodities like gold, silver, platinum, palladium, agricultural products and also Bitcoin.
Keeping in mind these CFD trading basics can help significantly help a beginner get an overall gist of this instrument. To know more, head over to one of the leading trading websites LiteForex.com.
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.