CFD or Contract for Difference involves the realization of profit or losses of an underlying asset which get settled in cash. Taking place between an investor and a broker, the former never owns the asset but only receives the difference as profits.
A Contract for Difference supplies a trader with a diverse range of assets which is one of the prime advantages of it. Another advantage of CFD is the availability of leverage which is why numerous traders find it beneficial compared to conventional trading.
To explain CFD trading meaning here are a few basics of how one can become a pro at it.
With going long, traders buy an asset with the thought that the price of it would rise in the future.
To briefly explain it, suppose David thinks the price of the shares of Nokia will go up in the coming time. He decides to buy 1000 shares at $10 each; the total stands at $10,000.
His broker charges a 5% margin or leverage over it and so David only has to pay only $500 to buy the entire position.
After sometime the price of the share does go up and reach $13; now the total value of the shares stands at $13,000. David gets the difference in amounts i.e. $3000 as profit.
Going long enables the trader to take advantage of the price of shares going down in the future.
For example, David thinks the price of the shares of Nokia might go down recently. He meets up with his CFD broker and decides to buy 5000 shares at $5 each which stands at $25,000. His broker provides 10% leverage and thus David has to only pay $2500 to secure the entire position.
The price of the shares decreases to $4 and now the total amount stands at $20,000. Therefore, David receives the difference $5000 as profit.
CFD trading meaning can be flawlessly explained through both of these methods; however traders can sustain a loss of the market were to move in opposite directions in each case. Again, the higher leverage a broker provides the larger loss a trader can potentially suffer.
CFD provides a range of assets other than just shares to traders and is another reason for its popularity.
Foreign exchange, indices, commodities, and treasury bonds are some which traders can take advantage of.
With foreign exchange traders can buy and sell all major currency pairs along with more than 300 others depending upon the broker.
Indices let traders invest with FTSE 100, UK 100, Germany 30, Canada 60, US 30, Australia 200, and others.
Commodities available that add more to CFD trading meaning are silver, gold, palladium, platinum, cotton, coffee, cocoa, copper, crude oil, gasoline, natural gas, feeder cattle, orange juice, oats, sugar, soybean, wheat, and more.
All of these assets have different trading sessions and are some are also conducted throughout the week.
Beginners can get a clear idea from the above CFD trading meaning explanation. For more information about Forex, trading, CFD, and more head over to 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.