Contract For Differences is a new way for investors to trade the markets. This form of trading is reaching new heights in terms of participation as it helps in speculating the markets in both long and short directions. When traders use CFDs, they do not own the financial asset and only trade on the price difference. They enter a contract with their broker to sell the asset at a later time and date.
Are there any benefits of Trading CFDs?
Before diving into what CFDs are, let us look at their potential advantages for traders. They can also be included as the characteristics of CFD trading.
- Margin. With CFDs, traders have access to a high amount of leverage. This is borrowed money that is available readily from the broker. Through margin, investors can open positions with larger lot sizes from a small capital. While this may bring good profits, it can also be deadly for your trading account as the losses are also high.
- Regulation. CFD trading is subject to regulation from prominent financial agencies, like the FCA. This makes sure that traders are not getting cheated while trading.
- Instruments. CFD trading covers almost all major instruments, including stocks, forex, indices, futures, etc. Brokers usally offer them all of them within their trading platform, eliminating the need to jump from one trading platform to another. Traders can open multiple positions with different assets at the same time.
- Long and short. As mentioned before, CFD trading allows traders to trade the markets in both long and short directions.
- Orders. The trading platform and broker can limit the type of orders available at your disposal. However, traders generally have access to multiple executions such as stops, limit, GTC, etc.
- Liquidity. The brokers connect with liquidity providers that ensure to provide the best liquidity. This can make getting and out of trades a breeze. Getting stuck with zero volume can be detrimental for scalpers who try and trade the markets in a split second.
- Trading opportunities. CFD trading is available to traders worldwide. Traders from all corners of the globe can open an account with a CFD broker and trade immediately.
How can you start trading with a CFD broker?
It is pretty easy to start trading with a CFD broker. Within a few steps, traders can get into the markets:
- In the first step, it is vital to find a reliable broker that comes under the regulation of authorities.
- Afterward, traders can easily sign up using their email addresses. It is also necessary to verify your credentials.
- There are multiple deposit options available from brokers that traders can use to fund their accounts.
- After the money shows up in the portfolio, traders can start trading immediately.
Costs of Trading CFDs
There are multiple account types presented through CFD brokers. The trading costs can vary accordingly. To understand better, let us go through a few available options:
- Standard. These account models come with trading costs that are built within the spreads. Traders have to overcome the spreads to make their trades profitable. For example, a buy trade on EURUSD at 1.1155 with a spread of 1 pip would require the position to go above 1.1156 to generate a positive outcome.
- ECN. Electronic Communication Network charges the costs through a fixed commission. The spreads on these accounts are negligible. They are a prime choice of scalpers, day traders, and HFT algorithms.
- Interests are charged on trades that are held overnight. Islamic accounts are free from rollover fees.