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What are CFDs?

Have you ever what CFDs are? Then you are in the right place. In this post, we will be examining the nitty-gritty of CFDs and how they can be traded.

A CFD refers to contract for difference. CFDs are derivatives of different money market instrument such as stocks, indices, commodities, and treasuries. Trading CFDs allows you to speculate on the rising and falling of these instruments without purchase of the underlying asset.

How to trade CFDs.

CFDs are offered for trading by forex brokers and can be traded just like normal currency pairs. The same leverage rules that apply to currencies apply to CFDs.

To trade CFDs if you do not have an account with a broker, the first thing to do is to create an account with a broker that offers CFDs.

You can check out our broker recommendations here. You can also check out our broker reviews here to know what instruments are offered by different brokers.

After creating an account, the next step is to fund your account.

Finally, you can locate your CFD of choice and trade normally.

Advantages of CFD Trading

CFD trading has a number of advantages which are:

  • High leverage condition: Leverage in other financial markets are not as high as those available in the forex market. Trading CFDs allow you to speculate on the instruments available in those markets while enjoying the benefits of leverage.
  • Global market access: CFDs are offered worldwide. This is opposed to the different markets being restricted to their geographical locations. This also allows traders to take advantage of actions in markets that normally would not be accessible to them.
  • No rules against shorting: The stock markets have rules that prevent the shorting of stocks. This prevents traders from making money when an instrument has been identified to be in a decline. This is not the case in trading CFDs. You can freely go long or short on any CFD when you wish to do so.
  • Variety of trading opportunities: Trading CFDs provide you with more tradable instruments in your portfolio. This is increases the possibilities available to you.
  • No day trading requirements: To take trade in the stock markets, there are minimum trading requirements. These rules will prevent trading if a certain capital limit is not reached. While trading CFDs, no such rules exist.
  • No exchange fees: Trading in the stock market attracts fees for trading that particular stock exchange. When trading CFDs, you have access to the instruments of an exchange without having to pay exchange fees.
  • Hedging is possible: When trading CFDs, you can hedge your position to reduce your risk.

Disadvantages of CFD Trading.

  • Regulation: Due to the weaker regulation associated with forex trading as opposed to the stock market, scam brokers exist. Therefore, it is important to do due diligence before picking a broker.

To know more about brokers click here.

  • Volatility: Due to leveraged trading, it is possible to take oversized positions and be overly exposed when trading CFDs. This can lead to losses. To prevent this, you need to apply appropriate risk management while trading.

Click here to learn more about risk management.

In summary, contract for differences are a great way to diversify your trading portfolio and have more trading opportunities. It also can be seen that the advantages of CFD trading outweigh the disadvantages. However, it is always advised that you should proceed with caution.

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