CFD trading (contract for difference) refers to an agreement between a trader and the broker for exchanging the difference between the opening and closing price of the agreement. CFDs belong to the category of the derivatives which allow you to trade on the different financial markets without actually owning the asset underlying. CFD trading has reached new heights recently and the growing number of response to this newer technique of marketing has led to the emergence of more and more brokers.
CFDs are leveraged products and therefore you get the facility of trading on high amounts by paying just a small portion of the overall trade. You can magnify your potential profits to a high level. But it has to be noted that the leverage can also result in bigger losses since your potential losses are also magnified in this case.
Salient features of CFD trading
CFD offers a number of advantages to the traders. Let us have a look on some of the special features of CFD trading.
Ability to take the advantages from both rising and falling markets – In trading CFD you can make profits in both rising and falling markets.
Hedging of portfolio – If you think that the existing portfolio you have taken is losing its value then you can use CFDs to offset the portfolio. When the market is volatile, many investors use CFDs as common instruments for hedging the portfolio they have.
Cost effectiveness – CFDs are traded without actually owning the assets. Therefore CFDs are extremely tax efficient and you have no obligation to pay the stamp duty and other costs of holding or transferring the assets. This feature has made CFD trading very popular as this is one of the most salient features of trading CFDs.
24 hour dealing – Many CFD brokers allow you to trade CFDs even if the market hours are closed and therefore you are able to open your account and trade whenever you want in trading CFDs field. Those who do not find time for trading in the normal hours find this feature very helpful.
High Leverage – High leverage offers the ability for the CFD traders to trade even without having sufficient money in your account. You need to deposit only a small portion of the total money for trade and this is deposited as margin money. The potential to get magnified profits appear when you trade CFDs with Leverage. However it should be noted that the risk is also magnified because the potential loss is also magnified when you take leverages. Therefore Leverages have to be handled with care and excessive leverage has to be avoided in CFD trading.
Ability to trade in a wide range of markets – There are thousands of markets which are available when you want to trade CFDs. These include all commodities, shares, indices, Forex and more. You can trade with the price movement in these markets without actually owning the assets.