CFD stands for contract for difference. It is not a complicated concept but it is actually a good concept. You can trade on any financial asset in the market on the idea that whether the price of any financial instrument will go up or down. Whether you will get a profit or loss is determined by the difference between the buying and selling price. CFD is called a contract because it is a contract between you and the service provider for paying the price difference on which way the market is moved. In CFD trading you do not possess any asset actually but you are just trading in the movement of the price of the asset.
So what is the reason you should trade in CFDs or you just trade directly in financial instrument itself? We are explaining some important features of trading online and CFD trading platforms so that you can decide if this is right for you or not.
With CFD trading you can trade the market in both ways
You can trade CFD in both the ways which means that you can trade both long and short. This is not easy when you trade with instruments like shares. You can benefit in both the direction of markets in CFD trade and shorting allows you to make money when the markets fall while going long allows you to make money when the markets rise.
Various CFD trading platforms
In CFD trading you get access to trade thousands of different financial instruments across the world through good CFD trading platforms. You can trade CFDs on all types of stocks available on all the leading exchanges, indices, foreign exchange, commodities and others. Many providers allow you to trade in multiple markets simultaneously from a single account and benefit from the movements in the prices in the markets. Those who have experiences in trading various financial markets directly can easily trade in the CFD markets related to those using their knowledge and experiences.
Leverage
In CFDs you can easily trade in high amounts depositing just a small fraction of the required money say 1 percent or less. Say if you want to perform a trade of 1000 dollars, your CFD provider may allow you to trade on their CFD trading platforms with just 10 dollar as the margin money. This leverage ratio is 100:1. So if the market moves in the direction you expected you can make a good amount of money as profit by just depositing a small sum as margin which is just 10 dollars.
High risks due to leverage
Trading CFDs need high risk management because in leverage you can also suffer huge losses if things go against you and you took a high leverage. So trading with leverage has to be done carefully.
There are other advantages and disadvantages too when you use CFD trading platforms. So a smart investor should first analyze that whether his trading style is suitable for CFD trading and after analyzing completely he can start this way of trading.