CFDs stand for Contract for Differences which are a better way to trade the financial markets. They allow traders to speculate the instruments and take positions on both long and short sides. This is possible as the trader is coming into a contract with the broker, which allows them to trade the asset without having to hold it. Let us go through the main characteristics of CFD trading and discuss the potential benefits that traders can avail through them.
Characteristics of CFDs
CFD trading is not complicated and can easily be understood by a beginner or an amateur. There are specific characteristics of trading CFDs that traders should know.
Brokers
CFD brokers provide traders with a route to trade derivative contracts. Some companies may come under the regulation of various financial authorities that ensure that the brokerage is not double-crossing their clients. Australian Securities and Investment Commission, Financial Conduct Authority, and Cyprus Securities and Exchange Commission are a few examples of notable CFD regulators. The brokers that come under these should always be a top priority for traders.
Availability of Leverage
Leverage allows traders to control a considerable amount of money with a small deposit. Some CFD brokers can offer up to 1:2000 in terms of leverage. The availability of margin can benefit investors to open up bigger lot sizes. It can also add to the risk as well.
Instruments
A CFD broker can house multiple instruments under a single platform. They can include forex, stocks, and indices.
Trading Costs
CFD brokers have their trading costs covered in two ways:
- Commissions. The broker will charge a fixed amount of money per lot size. The spreads, in this case, are kept at a minimal level. Most exchanges charge $7 per round lot turn for most currency pairs.
- Spread. The trading fees are built into the spreads. For example, trading GBPUSD at 1.15100 on the long side with a spread of 1 pip would require a trader to move above 1.1510 to enter a profitable stage.
Swaps or rollover fees are included with most brokers. Islamic accounts do not incur these costs as this is against the sharia of Islam.
Capital requirements
CFD trading does not require much amount of capital from the traders. The brokers keep their minimum deposit at a minimal level. Furthermore, with the implementation of leverage, traders are able to open larger lot sizes, as mentioned before, which removes the need for a higher balance.
Other features
Traders can open a respective position on both the long and short sides, which allows them to hedge a specific trade.
The contract can be opened and held for as long as a trader desires as there is no fixed expiry date attached.
Traders can access multiple order types, e.g., GTC, Limit, etc.
A Few Benefits of CFD Trading
CFDs have become more popular as they have many underlying benefits for traders. Some of them are listed as follows:
- They allow traders to open positions on both sides of the market
- They provide a good amount of leverage to traders
- Multiple account types within a broker can cater to the needs of different traders. For example, an ECN account under a CFD brokerage can be beneficial for scalpers
- The trading costs are kept at the lower end
While CFD trading may appear lucrative to many, traders should be cautious while using leverage. A good measure of risk management, psychology, and proper strategy can ensure that an investor is profitable in the long run. While CFDs allow a better trading environment for many in the end, it boils down to the trader’s ability.
