Contracts for difference in price or Contract for Difference (CFD) is the most popular trading tool that is used in almost every market. The advantages are very appealing for both novice and experienced traders. Let’s look at the advantages and disadvantages.
Contract for Difference (CFD) - a contract between a trader and a broker, with which you can earn on the price difference of any underlying asset at the time of conclusion of the contract and the current price.
The underlying asset in this case can be both goods and raw materials, stocks, bills and other types of valuable assets. In essence, CFD is a comparison of the movement of the real quote price with the price specified in the contract, the resulting difference is the profit. There are no strict restrictions on the assets for which contracts are concluded. As a result of this, many markets are available to traders: stock markets, commodities, raw materials, securities, stocks, and many others. The most popular underlying assets are stocks. It is important to understand that the main thing in CFDs is the speculation on the price difference, and not the actual sale of any asset. Thus, you can earn on the shares of major companies without even buying these shares.
The logic behind the contracts for difference is very simple. For example, if a trader is sure that the price of a specific underlying asset (and this can be almost anything) will increase, he makes a deal with the broker. You don’t receive the asset; a contract is enough. And if the price rises, the trader will receive a certain profit, if it falls, the trader will receive losses. Naturally, the more expensive the asset, the more profit you can get.
Another important note: you do not need to wait for the completion of the contract in order to close it, as is usually the case with forward contracts. You can trade at any time, regardless of the timing.
CFD trading has a range of benefits that are usually provided by brokers.
The CFD market has certain drawbacks
A lot of traders use a trading strategy, focusing on the news. It is there that you can find out the prerequisites of market volatility, including the most significant leaps and changes in trends. In CFD trading, this is fully utilized.
News has a strong influence on the prices of many assets and given the fact that the CFD market is usually for short-term trading, traders should carefully monitor the news and changes in the world economy.
News trading, as such, is based on news press releases that are ahead of standard news and are a key source of information for traders. Thanks to press releases, traders can speculate on asset price volatility. At the end of each month, traders are closely watching the release of NFP - the US economic jobs indicator. Usually after the release of NFP that market often experiences major volatility and fluctuations, which can be beneficial for CFD traders. But any fluctuations in the market can carry both positive and negative consequences. Therefore, traders as a rule do not open large deals before the release of news indicators or press releases.
Therefore, experienced CDF traders carefully monitor the flow of news, so as not to miss the chance to increase profits or the ability to reduce risks.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 58% of investor accounts lose money when trading CFDs with this broker. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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