WHAT ARE CFD’S?
Contracts for Difference (CFDs) are derivatives with which you can invest in financial markets by trading on the price fluctuation of an underlying asset. You do this without actually having to purchase or sell that asset.
Originally created in the early 1990s by the London Stock Exchange, CFDs became popular among retail traders as a means of hedging investments. Another advantage was their simplicity and the leverage offered. In 2007, Australia was the first country to maturity. Also thanks to small contract sizes, you may buy as little as a one share-based CFD to maximize returns. This makes CFDs especially attractive to new traders.
Today, many investors prefer CFDs to regular futures contracts due to their open expiry date. As a result, these contracts do not lose or gain value the closer they are to maturity. Also, thanks to small contract sizes, one may buy as little as a one share-based CFD, making them especially attractive to novices to maximize your returns.
CFD’s – What are they good for?
The amount of money won or lost on a CFD is equal to the difference between its opening and closing price. This enables investors to trade without investing the larger sums involved in purchasing the underlying asset.
In addition, the absence of broker commissions allows you to open as many positions as you want. With leverage of up to 400 times your personal investment, for every dollar you invest, the broker invests $400, increasing your potential profit.
To make this simple, let’s assume that you are getting ready for a trip to Las Vegas and you exchange 500 Euros into Dollars. A week later, you find out that your trip was cancelled and you decide to change your Dollars back into Euros.
Surprisingly, you end up with 515 Euros: a profit of 15 Euros!
This is known as a profitable CFD trade. You initially purchased
Dollars at a certain rate of exchange and during the week that
followed, the value of
the Dollar went up against the value of the Euro.
Without even meaning to do so, you managed to make a small
profit as you bought your Dollars at a low rate and sold them
back at a higher rate – the aim of any successful trade.
Leverage gives you the ability to open a trading position while using only a fraction of its total value. Doing so, allows you to control larger trade sizes and to magnify your overall returns.
As a CFD trader, you get access to all 3 major markets – stocks, commodities and indices. The opportunity to trade on such a wide variety of markets and assets provides you with the foundation to build a balanced and strong trading portfolio. The decision is yours!
Trading in CFDs gives you the ability to produce profits, regardless of the asset’s market price direction. You can open a “SELL” position and profit as the asset drops in price.
You can set your exposure level by adjusting the “stop loss/take profit” parameters. This standard feature will automatically close any open positions if the price either drops or rises beyond a predetermined point, thus locking in profits and minimizing losses.