CFD (Contract for Difference) has provided the investors and the traders with an opportunity to gain profit without owning the underlying asset. In such a trading the profit is gained from the changing values of assets during trade entry and exit. The difference of these values becomes the profit for the investor and this profit is not affected by the underlying original value. So, profit can be gained from an asset that you own.
A contract is signed between the client and the broker, so basically you are not really buying an asset, but you are buying this contract and whatever profit comes from this contract goes straight to your pocket. Trading CFD has gained popularity very quickly which is mainly due to all the befits that it provides with and how easy it makes everything.
How does trading CFD work?
So, let’s say that a share has a price of $25.26. The trader pays for 100 shares and buys them. His total expenditure would be 2,526 USD with an additional commission and fee that will increase this amount even more. So now if you go to the traditional broker you will require 50% margin account to trade this share. However, with CFD trading you would only need about 5% of the margin. In CFD the loss would be equal to the size of the spread when the transaction was done. This means that if the spread size was 5 cents the stock will also need to go 5 cents up to even out the price.
Furthermore, if the stock reaches a value of $25.76, it can be sold again with a price of $50 which gives a 3.95% profit in a traditional broker. However, if the national exchange reaches to this value the CFD profit may fall because the trader needs to quit at the bid price and the spread will also be longer.
- It is a global market
This trading is not limited to our country only. In fact, all the world traders present their products in different important and big markets worldwide. It allows a global access to the business and helps in flourishing more.
- Free of shorting restrictions
Shorting can become very profitable in the stock market however some markets have put restrictions on shorting and force the trader to buy the product before it is selling short. However, in CFD it becomes a lot easier because the trader is not owing any underlying asset and the products can be borrowed anytime without even paying any money for the borrowing.
- Cheap and professional handling
The CFD brokers are not much different from the traditional brokers, they also offer the same stops, limits etc. In this case the profit is made from the money that the traders pay for the spread. If you are a trader and want to buy anything you will have to pay the ask price and pay the bid price. The value of the spread depends greatly on the underlying asset and for how long it is going to survive.
Disadvantages of trading CFD
Like everything else in this world this trading also has a very few disadvantages.
- The spreads can be difficult to pay
Sometimes it can become very difficult to pay the spread and after paying for that the profit becomes very minimal. The spread also affects the number of winning trades and can cause a decrease in it.
- Is very risky
Well that’s true there is some risk in it. Since the CFD trading is not a very well-established industry yet it is very hard to find genuine people. It all works on how good of a reputation you have, the life span also affects it.
CFD trading has its both advantages and disadvantages. While it makes it easier to connect with the world it also has high risk of a loss.