Contracts for the difference

Before getting into why contracts for difference trading can be a method that becomes your go-to option, let’s understand what it really is.

Contracts for the difference basically allow traders to pitch into price movement with only a fraction of the profit. If the assumptive prediction holds true, then investors get the differential profit and vice versa in case of losses.

Suppose XYZ trader predicts that the value of EUR is going to rise in the EUR – USD currency pair. In this case, XYZ will contact a CFD broker and enter a contract in which he or she will buy 200 units of EUR and expect prices to rise. The CFD broker will let XYZ pay only a part of the capital, say 5%. When the trade is closed, if XYZ makes a profit, he or she will avail the benefit of all 200 units minus the investment fee of the CFD broker. With losses too, he will have to bear a similar burden.

Now that you know what contracts for difference trading really is, let’s look into why it can be a lucrative trading option for you.

  • Flexible hedging options – while this type of trading may be a deterrent because of high risks, it also offers some flexible hedging options. This way, one can make some amount of recovery while dealing with losses.

To hedge in a CFD trade, all one has to do is open multiple contracts and create a scenario where at least one of them will bear fruitful results.

  • A contract for the difference document is binding and money withdrawal has no other conditions. Often with many Forex brokers, withdrawing profits is based on multiple circumstances like amount of trade that is done, money earned, and balance in the account.

  • Let’s investors get in on large volume trades with just a portion of the investment. This trading system could very well be used as a hack during moments of international revelations where price direction can be predicted quite accurately.

  • CFD trading allows execution of trades without any extra added costs. Traders can use this system to start trading with traditional ways of stop loss or take profit. Most brokers don’t charge for this service and earn their revenue by making traders pay for the spread instead.

With benefits such as these, CFD will obviously become a go-to trading option for most Forex traders. However, there are a few more things that one should keep in mind.

The tax treatment that CFDs receive may come in handy for investors looking to exempt paying unnecessary taxes.

No, it isn’t that CFD trading is exempt from tax. Rather, while making big trades on CFDs, investors hedge with other small contracts. In any case, you can use these losses to cut your taxes as you trade on. Great, isn’t it?

That’s the thing about contracts for difference trading, there are beneficial loopholes everywhere. Read up more about how brokers carry out things in this trade system to use it effectively.

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.

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