Why are CFD’s so popular for investment traders?
CFD trading is a popular way for investors to actively trade in the financial markets.
The advantages of CFDs are:
What are CFDs?
A contract for difference (CFD) is essentially an agreement between a trader and a CFD broker or bank. At the end of the contract, the parties exchange the difference between the opening and closing prices of a particular financial instrument, such as a share of the Dax index. It is important to understand that at no time do you have physical ownership of stock when trading CFD’s.
What is a Margin?
CFDs are leveraged products. This means that the money you invest usually represents only a fraction of the trade value, for example:
with a leverage of 100:1 for every 1€ you trade with you have the trade power of 100€
As a result, CFD trading is not only available to large investors, but is also suitable for small investors.
A difference contract is also a very popular trading form of derivatives trading. CFD trading allows you to speculate on rising or falling prices of fast-moving global financial markets (or instruments) such as stocks, indices, commodities, currencies and treasuries, as opposed to stock trading. You can also use CFDs to hedge an existing physical portfolio to protect yourself from the risks of high volatility.
Understanding CFD Trading.
When you open a CFD position, you first select the relevant market and the size of the trade, sizes are calculated in ‘Lots’. The profit increases with each point as the market develops in the desired direction. The same applies of course the other way round, if the market develops in the opposite direction, there will be losses. CFDs are therefore complex instruments and because of the leverage, are associated with the high risk of losing money.
Assuming that the price of oil will rise, you can place a Buy order to trade 5 Lots at the price of 49.33 USD. If the market rises 30 cents to 49.63 USD and the position is closed, the result would be a profit. After closing your position, you would make a profit of 150 USD, which is 500 times the price change in the oil price. However, if the market moves in the opposite direction and the price of oil falls by 30 cents to 49.03 USD, it would incur a loss of 150 USD.
Since you can go short and long when trading CFDs (also at the same time), these products are also used as an “insurance” to compensate for losses of a physical stock portfolio.
For example, if you hold DAX stocks and fear that the market price will fall, you can use the CFD short trade, where you can then benefit from falling DAX rates.
And therefore, gaining a profit in the CFD short trade. In this way, one can protect the other without bearing the costs and inconvenience of liquidating the stock portfolio, as these are usually higher than CFD’s.
CFD markets can I trade in?
indices such as DAX, Dow Jones, S&P 500, Nasdaq, FTSE Stocks such as Google, Facebook, Deutsche Bank, BASF Commodities such as oil, silver, palladium, wheat, cocoa
markets including bonds, interest rates and options.
CFD trading suitable for me?
A CFD Trader has the opportunity to achieve a high return and earn a lot of money. With CFDs, it takes a high risk, so this type of trading is not suitable for everyone. Before you start trading in real life, consider whether you can afford to take the risk and whether you understand how CFDs trade in detail. It is recommended that you trade CFDs first on a demo account before going into a real money account. In addition, it is wise to be well informed about CFD’s and leverage before trading
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