According to the industry insiders, CFDs are considered as short term wagers, like spread bets, as they are used for monetising the rise and fall of the value of a currency, index, commodity or stock over a particular period of time. The investors are allowed to make money from asset classes and stock markets by using CFDs without buying the said assets actually and paying any fee for it.
But, according to them, the level of risk with CFDs is higher. The providers of CFD allow the investors to buy an asset on leverage which means that they can bet with cash money in higher quantity than they can afford. It can be good for the clients if the value of the certain asset increases within specific time period. In this way the benefit of the CFD depends upon the size of return over the amount of their bet.
In order to understand the concept of CFD more precisely you must know what it is and its benefits and drawbacks. Brief information in this regard is provided here under for your reference.
What are CFDs?
CFD or Contract for Difference can be defined as a contract that deals with the difference between the values of an asset when it enters a trade and exits the trade. It shows the movements of the asset underlying this contract, which is a tradable instrument, and allows to realise profits and losses. When the value of underlying asset moves in comparison to its opted position, without owning it in reality, the investor can earn or lose money through CFDs. In this way, CFD is a contract between a broker and a client for such trading activities. CFD trading has gained popularity during last few years because of various conspicuous benefits of this trading instrument.
Benefits of CFD trading
Higher leverage: As compared to traditional trading the leverage is higher in CFD trading. The lowest margin required for standard leverage in the CFD market is 2% which can go up to 20% as per the requirement of the underlying asset. The investor can expect higher returns with less capital investment and lower margin but his losses can increase with higher margin of leverage.
One platform to get access to Global Market: Products from the major markets of the world are offered by most of the CFD brokers which allows traders to trade on any market open to the broker’s platform.
No rules for borrowing or shorting stocks: Shorting of stocks is prohibited sometimes in certain markets. The traders have to go for different margins or borrow the instrument before shorting to control it. But the absence of shorting rules in CFD market the trader can short an instrument any time as the underlying asset is not owned by him.
Execution without any fee: Most of the order types offered by CFD brokers like limits, contingent orders including if done’ and one cancels the other’ and stops are similar to traditional brokers. But some of the CFD brokers offer guaranteed stops against some fee. But most of them do not charge any fee or commission while entering or exiting the trade as they make money from the payment made by traders for the spread depending upon the volatility of the underlying asset.
No need of day trading: The restrictions of least amount of capital and amount limitation for opening of accounts for day trade are not applicable in CFD market as traders can open accounts with any amount of money to day trade, if they like.
Various trading options: CFDs can be traded in any type of asset whether it is index, stock, commodity, currency or any other similar sector. Tus this financial vehicle can be used by any trader including stock traders.
Lesser chances of profit: The amount of profit reduces by paying the spread on entering and exiting a trade. In this way it can increase the chance for loss than income, even if the trader has to face no restrictions and fee payment.
Unregulated industry: The credibility of CFD broker depends upon his financial position, reputation and lifespan as this market is not properly regulated. The trader will have to be careful while finding a good broker.
Thus, according to the insiders of CMC Markets, investors can make money in CFD market by finding a CFD broker carefully to take the benefit of the advantages this trade offers them.