CFDs are trade contracts for difference in rates. With the help of this tool, a trader can earn money on a fluctuation of the asset's rate, where the final profit depends on the number of points that the price passes from opening a deal. When making a contract, you do not need to physically buy an asset, it is enough to conduct a digital operation that will be executed instantly at the moment of closing the deal.
When trading with CFD, the leveraging mechanism is used. With its help, there is an opportunity for trading, when more money is invested in the purchase of the contract than at the current deposit. This allows, in case of successful trading, to get the maximum profit. If the forecast is not justified, then the trader risks losing all or part of his investment.
To make it easier to understand what CFDs are, you need to study a real example that practically indicates the efficiency of this instrument. To open a deal, you need to select an asset, specify the investment amount, determine the direction of trade and open a deal.
For example, you think that the asset BTC/USD at 1.2000 has been overestimated and you should invest $ 100 in its downgrade. If after the close of trading your forecast was justified, and the quotes of the asset are, for example, 1.1980 (the market passed 20 points in your direction), then you earned. The profit is calculated as follows: 20 points * $ 100 of investment = $ 2000. In the event that your forecast was not proved, you risk losing the full amount of your investment. It is recommended to use the stop-loss tool to minimize risks in trading operations and minimize financial losses.
ADVANTAGES OF CFDS
The main advantage of CFDs is that the trader has the opportunity to work with a large amount of assets, and also use the leverage mechanism to increase the potential profit on successful forecasting. You have the opportunity to enter the real financial markets without much capital.
An additional advantage of the contracts is no commission fees that are common to most brokers and banks that conduct offline activities.
WHO WILL USE CFDS?
Transactions for difference are used by investors who seek to increase their capital through financial markets. The CFD tool is ideal for investors who refuse to purchase the underlying asset, focusing only on profitable trading operations. The contracts are both for experienced traders and beginners who do not have experience in investment activities and special financial education. The difference between these types of traders is that an experienced investor can immediately start trading, and a beginner is provided with free training materials. With their help, you can understand the trading process, in order to be aware of opportunities and risks of financial activities.
Traders are increasingly using CFDs for their investments, since they have an optimal ratio of risk and potential profit. The trends are the following: annually there are more and more people choosing to trade contracts for difference. This is the best indicator that the tool is successful and promising. Traders are attracted by the security and transparency of trading operations, the use of leveraging, a large selection of underlying assets, the ability to manage risks and other benefits.
Most investors choose CFDs because they allow them to distance themselves from physical purchases. For example, if you decide to purchase shares of the company through offline banks and brokers, then after acquiring the shares, you will need to find a buyer yourself. CFDs have no such a drawback. All deals are made in real time, and you do not need to wait and find a buyer, since this is the work of the platform itself.
FREQUENTLY ASKED QUESTIONS
Below is a list of the main frequently asked questions for beginners about CFD trading.
1. IS THE CFD SIMILAR TO TRADING IN THE FOREIGN EXCHANGE MARKETS?
CFDs are a financial instrument, an integral part of which is trading in foreign exchange markets. In addition, you can use in your trading stocks, indexes and commodities as an underlying asset. The forex market is not a type of trade, and CFD is the type of trade and the type of contract in which the currency pair acts as an underlying asset. We draw your attention to the fact that trade for difference in rates is an investment tool that requires a thorough analysis of the market before the deal opening. You must make your own deliberate decisions that will satisfy your interests.
2. WHAT ARE THE RISKS IN TRADING?
Any investment activity bears high risks. CFD is not an exception. If your forecast is incorrect, then you risk losing your deposit. Risks are an integral part of trading, because even experienced and successful traders open unprofitable deals. Therefore, it is important to be able to control these losing deals and cover them with profit. For risk control, our platform is equipped with tools to limit financial losses. Be sure to familiarize yourself with the possibility of using these tools before trading.