A Primer on CFD Trading

A Primer on CFD Trading

  • Posted on 1919-0808-2020
  • by Gareth McCauley

CFD trading has been steadily gaining popularity in the last decade. It is an accessible financial instrument ideal for anyone looking to diversify their trader’s portfolio. Traders look to this option when building their investments, as this is known to help mitigate risks.

Fair Forex provides a quick guide on what CFD trading is and why you should consider it for your portfolio. Learn more about this financial instrument and its advantages before you decide if it’s for you.

 

What is a CFD?

A CFD, otherwise known as a Contract for Difference, is a financial instrument that allows traders and investors to profit without having to own an underlying asset. It is a form of derivative trading where there is a contract between a trader (buyer) and a broker (seller). With this contract, the trader speculates on the price of an asset in the existing market conditions. They then earn the difference in product value from the start and end of the contract.

Trading in CFDs

In CFD trading, profit and loss are calculated with the difference in the price of the underlying asset. If the trader made a profit from the price difference between the beginning and end of the contract, the broker will pay it. If there is a loss, the trader will pay the difference.

CFD Trading

 

Different Types of CFDs

CFDs can be traded on a vast selection of financial assets. The range of markets where CFDs are traded is expanding, making this a good option for diversification.

Index CFDs

There is a preference among traders for contracts based on index performance. This is likely due to higher leverage and liquidity. Traders who choose to trade in indices often believe that the market will rise as a whole.

Share CFDs

This is the most popularly traded CFD in the market. The price of the contract comes directly from the underlying asset. The risk in this type of CFD is the potential price drop of the product in the market.

Commodity CFDs

There are two types of commodities, namely hard and soft commodities. Hard commodities are mined (e.g., gold, rubber, oil) while soft commodities are grown (coffee, sugar, livestock). Trading in CFDs for these commodities makes the process less complex and reduces the cost.

Sector CFDs

When you trade in sector CFDs, you look at the economy as a whole and identify areas that have solid growth potential. It gives you instant diversification as you can profit from all the companies under that one sector.

Treasury CFDs

As the name suggests, this type of CFD will have you speculate on the value of treasury notes. Treasury CFDs are open to several countries around the world. Traders often look to US Treasury Notes, Australian Treasury Bonds, and Euro-Bund for this option.

 

Advantages of Trading in CFDs

Higher Leverage

With CFDs, you only have to deposit a fraction of the trade’s full value for a position. It gives you lower margin requirements but higher leverage, which provides greater ROI potential.

No Shorting

CFDs are more flexible than other trading instruments. With this option, you may trade on markets that are heading down. This is possible because you don’t own the underlying asset you are trading.

Diverse Markets

As mentioned, trading in CFDs allows you access to a wide range of markets. You even have the advantage of making trades outside of trading hours.

Better Accessibility

When you trade in CFDs, everything is available to you through your browser. It gives you access to different markets at all times without having to open several tabs or download multiple apps.

No Professional Fees

Most of the time, a broker will not charge a commission or other fees in CFD trading. Since they make money when you pay the spread, you don’t have to pay them after the contract closes.

 

Fair Forex: Your Partner in CFD Trading

Fair Forex is here to help you grow your trader’s portfolio and build your wealth. We are made up of a team of trained professionals who are well-versed in CFD trading. We will gladly help you get more familiar with this financial instrument and how you can profit from it.

Get in touch with us for more information.