CFD is a relatively new way to tackle the financial markets and involves trading using contracts that expire at a fixed time and time. This binding helps traders open their positions in both long and short directions and use significant leverage to their advantage.
In other terms, CFDs stand for Contract for Differences which defines that the buyer will pay the seller, i.e., the broker, the difference in the price of an asset at the opening and closing of the contract. There is no exchange involved in the process, and no physical ownership of the instrument occurs.
Understanding Important Features
CFD trading comes with wide-ranging benefits for traders. Let us go through some of them in detail and write how investors can take advantage.
There are multiple account types available for traders in CFDs. A few important ones that most brokers generally provide are:
- Standard. The trading costs come in the form of spread, i.e., the difference between the bid and ask. When traders buy, they do so at the bid and sell at the asking price.
- ECN. Electronic Communication Networks come with zero or minimal spreads and cover the costs via a fixed fee charged per lot. These portfolios are best for traders looking to scalp the markets.
- Micro and cent. Micro and cent accounts have the same fee structure as the standard, but the lot size equals 1/100 or 1000 of a standard portfolio. These are handy for lowering the overall risk.
CFD trading hosts instruments of all types such as forex, crypto, stocks, indices, futures, commodities, etc. Before opening an account with a CFD broker, it is important to check what assets are available to trade.
As discussed, traders can open positions on both the long and short sides. This opens doors for using hedging, averaging, and martingale strategies.
Availability of Margin
Leverage is borrowed money from the broker that helps open positions with larger lot sizes. Once the trade is closed, the brokerage takes back its portion of the investment, and the trader takes back the profit or losses. CFD products can have unlimited margin available, which can also be limited by the broker.
Micro and cent accounts can offer $0 in the minimum deposit requirement for traders. For ECN and standard portfolios, traders can start from $100 or $200.
The amount of liquidity in CFD trading can lack to a certain extent. To maintain a good volume, brokers connect themselves with several liquidity providers.
Regulation is one of the critical aspects of financial markets as it ensures that the brokers play fair with their clients. Regulators keep a good eye on exchanges and fine them if they detect any suspicious activity.
The trading hours for the markets are limited to the exchange. Traders can only open or close their positions when they are open. Some after-market trading is also observed in some cases, such as the stock market, but it is not familiar with CFDs.
Disadvantages of CFDs
There are some drawbacks of CFDs as well, which are listed as follows:
- High leverage can damage an account and probably cause a margin call if used unprofessionally. Traders should avoid using more than 1:10 on their accounts.
- A high spread can cause slippage on the account and cause unfavorable entries.
While CFD trading is the new future for financial markets, keeping your risk under control for each trade is vital. Professional recommend that each position should not exceed more than 1% of your account balance in the lot size.Follow and Subscribe Nyasa TV :