A contract for difference or simply referred to as CFD is a contract between two parties (buyer and seller), wherein the buyer is required to pay the seller the difference between the asset’s current value and its value at the time of the contract. CFD trading is an excellent opportunity for traders to make a profit from the price movements of the underlying asset without actually owning it. Trading CFDs has become much more popular in recent years, considering its countless benefits, which we are going to discuss today.
A unique feature of CFD is that there’s no physical delivery of CFD instruments, unlike conventional trading instruments. Thus, a CFD never owns the asset but only receives a return which is based on how much the price of the asset has changed at a given point in time.
Advantages of CFD Trading:
Here are some of the key benefits traders can get from CFD trading. So, if you are still figuring out if it is the right choice for you, read on.
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Higher Leverage:
One of the greatest benefits of CFD trading is that traders get to access higher leverage compared to traditional trading. Although standard leverage in the CFD market is subject to regulation, many brokers offer 30:1 with a margin requirement of 2%. Lower margin requirements mean higher leverage, which allows traders to gain maximum returns with lesser capital outlay. However, note that higher leverage can also magnify the traders’ potential losses. Therefore, higher leverage should only be used if there is an effective risk management strategy in place.
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Access To Global Markets From One Platform:
Another excellent advantage of CFD trading is that this type of trading is available for all the major financial markets of the world, such as currency, indices, commodities, crypto and more.
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No Day Trading Requirements:
There are certain financial markets which mandate minimum capital requirements for day trading. Or, they may limit the number of day trades that can be placed with specific accounts. However, CFD trading is not bound by such limitations, thereby allowing traders to get involved in day trading as and when they please.
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A Wide Variety of Trading Opportunities are Available:
Currently, brokers offer CFD trading on the index, treasury, currency, stock and more, enabling traders to diversify their portfolios and invest in a wide range of financial vehicles without exchanges.
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Resemblance To Traditional Trading:
CFDs are the only assets which you can trade without owning them. There are several similar assets: futures, spreads betting and options. However, if you are an expert in traditional trading, you will find that CFDs are much easier to trade than other derivatives. The reason is, in CFD trading, you buy and sell contracts which are designed to mirror the asset they actually represent.
The Bottom Line:
There are several advantages of CFD trading, including low margin requirements, access to global financial markets, no restrictions on day trading and many more. However, it is worth mentioning that high leverage can also magnify potential losses, which is why many regulatory bodies restrict CFD trading to protect the traders’ interests. If you are interested in CFD trading, it is important that you first have a deep understanding of how CFDs work and have an effective risk management plan in action to minimize the risks associated with them.