First of all, let us start with the definition of the “CFD”. It is actually an acronym for Contracts for Differences. It gives a retail trader the possibility to benefit from the price movement of a certain financial market (stocks, commodities, equities, equity indexes, forex, etc.) without owning the underlying asset. These instruments are perfect for speculating.
A CFD is a tradable instrument that mirrors the movements of an underlying asset and it is perfect for profiting from the short term trades without having the costs associated with the ownership of the asset. It can also be considered a contract between the client and its broker. Trading CFDs has several major advantages, and these have increased the popularity of the instruments over the last several years.
- Higher Leverage
Trading a CFD provides a higher leverage than traditional trading. Depending on the underlying asset, the leverage could go from 1:2 (50% margin) to 1:100 (1% margin and most common in Forex Market) or all the way up to 1:1000 (found only with the underlying asset FX).
- High number of trading instruments
Most CFD brokers offer instruments in all the world’s major markets, and not only. This way traders can easily trade any market, while it is open, from their broker’s platform.
- Trading on both sides
Thanks to the fact that a trader, using CFDs, doesn’t have to own the underlying asset he/she can enter both long and short positions. Certain markets have rules that prohibit a shorting at certain times, requiring the trader to borrow the instrument before shorting or to have different margin requirements for shorting, as opposed to being long. All of these are not generally present on the CFDs market.
- Low deposits requirements
Thanks to the small margin requirements for trading CFDs, brokers have reduced their first minimum deposit.
- Low fees per transaction
Many brokers, depending on the type of account, do not charge commissions or fees of any kind to enter or exit a trade. The broker makes money by making the trader pay the spread. The trader must buy the ask price, and to sell/short, the trader must take the bid price. The spread depends very much on the volatility and the liquidity of the underlying asset. It is usually small in a high liquidity and low volatility market and big in a low liquidity and high volatility market.
The Information or materials published or submitted by Forex Rally are exclusively for educational, informative or analysis purposes and cannot be considered recommendations to purchasing/selling/keeping of a particular financial instruments. They are not and should not be treated as indications or tips on trading strategies for real or demo accounts. Forex Rally warns the Users/Clients that past performance of Financial Instruments is not an indicator of future performance. Forex Rally assumes no responsibility for the outcome of transactions based on or influenced by any of the above-mentioned information. Forex Rally warns that Financial Derivative Instruments are complex instruments and leveraged products that involve a high level of risk which can result in high losses, including the risk of losing the entire capital invested by the Client. Such instruments might not be suitable for all Clients. The Client should not engage in transactions with such Financial Instruments unless he/she understands and accepts the risks involved by trading Financial Instruments, taking into account his/her investment objectives and level of experience.
