What is CFD?
CFD is an abbreviation for contract for difference which enables you to speculate on over the counter (OTC) markets in underlying financial assets (instruments) such as shares, indices, commodities, currencies, and treasuries. A contract for difference is a financial derivative product that allows a trader to benefit from the difference in settlement price or price movement between the opening and closing of a trade rather than owning the underlying asset. CFDs are a popular tax- efficient way of speculating on the financial markets and are extremely popular amongst forex and commodities traders. By agreeing with a CFD broker, you agree to exchange the difference in the price of an underlying asset from the opening of trade up to its closing.
What is CFD trading?
CFD trading is a type of trading that allows a trader to speculate on the rising or falling prices of fast-moving international financial markets, such as forex, commodities, indices, shares and treasuries. When you open a trade at a price, you wait for the price to rise or fall, and you eventually make a profit or suffer a loss on the price difference in the value of the asset at the time you made the contract.
How does trading CFD work?
CFD trading gives a trader the chance to profit if a market moves up or down. It is a flexible recommended alternative to traditional trading which gives a trader the flexibility to trade on the price of an asset, rather than owning or buying the underlying asset itself. By not owning the asset, you can make a profit from underlying markets rising in price and also those falling in price. As a CFD trader, you can capitalize on either rising or falling market, twenty-four hours a day. With CFDs, traders are permitted to trade any of the following securities: currencies, shares, indices, and commodities such as oil or gold. Each CFD has a buy /ask /offer price and sells/bid price depending on the price of the underlying asset. Depending on whether you are anticipating an increase or decrease in prices, you can enter either a buy or sell CFD trade. FXCentrum offers CFDs on a broad range of global markets, covering currency pairs, commodities stock indices, treasuries, and shares. An example of one of the popular stock indexes is the FTSE 100 an index that tracks the 100 largest companies on the London Stock Exchange.
What do margin and leverage mean?
CFDs are leveraged products, which give you the opportunity to deposit a small percentage of the full value of the trade so as to open a position. This phenomenon is called ‘trading on margin’. While trading on margin permits you to magnify your returns, your trading losses will also be magnified as they are based on the total value of the position. Hence, you could lose all of your investment, but as the account has negative balance protection, a trader can’t lose more than their account value.
What instruments can I trade with?
You can take a position on multiple instruments when you trade CFDs with us. At FXCentrum, we have good spreads and you will have access to several CFDinstruments such as currency pairs, shares, indices, and commodities such as oil or gold.
Click Here to Check out our article on
Currency Pairs Traded in Forex!
What are the costs of CFD trading?
Spread: When trading Contracts for Difference, you must pay the spread, which means the difference between the buy and sell price. You enter a buy or long position using the buy price quoted and sell using the sell price. The smaller the spread, the lower the price that needs to move in your favor before making a profit, or if the price moves against you, a loss is made.
Holding costs: a trader may be charged a CFD holding cost at the end of each trading day (which is at 5 pm New York time) for any positions opened in their account. These charges can either be positive or negative based on the direction of your position and the applicable holding rate.
Market data fees: before you trade CFDs, you must activate the germane market data subscription, for which charges are made.
Commission (only applicable for shares): a CFD trader must pay a separate commission cost when trading share CFDs.
Countries where you can trade CFDs
Because CFDs are regarded as over-the-counter products that are properly regulated, their contracts are not permitted in the United States and Hong Kong. They are however allowed in listed markets in many major trading countries. This includes the United Kingdom, Switzerland, Germany, France, Singapore, Spain, South Africa, Hong Kong, Canada, New Zealand, Norway, Sweden, Italy, Thailand, Denmark, Belgium, Netherlands, Australia, and Nigeria. In Australia, the Australian Securities and Investment Commission (ASIC) announced some changes concerning the distribution of CFDs to retail clients. They aim to strengthen consumer protections through the reduction of CFD leverage available to retail clients. While the U.S. Securities and Exchange Commission (SEC) has banned the buying and selling of CFDs in the U.S. non-residents can still trade them.
Advantages of trading CFDs
● Do not expire.
● It can be used with a hedging strategy.
● Enable a trader to trade on both rising and falling markets.
● Grant traders the ability to go both long and short on underlying assets.
● Offer a wide range of markets. CFDs allow investors to trade the price movement
of assets including ETFs, stock indices, and commodity futures.
● A trader can enter various markets, like commodities, currencies, shares and
indices from the same trading platform.
● Provide higher leverage thereby allowing traders and investors to invest a small
amount with a broker.
● CFD brokers typically offer CFDs with higher leverage than other traditional
● Spare traders from the costs of traditional trading.
Cons of CFD Trading
· leverage can also magnify losses the same way it amplifies gains with CFDs
· excessive price volatility or fluctuations brings about wide spreads between the buy and sell prices from a broker
· The CFD industry is not highly regulated, hence it is restricted in countries such as the U.S., due to the lack of regulations, traders are reliant on the reputation and credibility of brokers.
Enter the CFD markets with FXCentrum to trade a variety of instruments. With FXCentrum you can trade the following:
UK Brent oil (spot)
US crude oil (spot)
US natural gas (spot)
S&P 500 (US 500)
How to trade CFDs?
1. Choose your broker: There is nothing as awesome as trading CFDs with a reliable, experienced, and credible broker. Once you have opened your CFD trading account, select your preferred CFD instrument then start trading. It is also recommended that you start trading your preferences on a Demo account to make sure you are comfortable with the instrument and your chosen trading strategy before entering the live CFD market.
2. Choose your instrument: Selecting your underlying assets (forex CFDs, index CFDs, shares, and commodities CFD such as oil or gold is an important decision. Not sure which to select? Check out our articles on currency pairs and the underlying assets you can choose from. . You can also visit our contract specifications page, to find out about instrument leverage specifics as well as our competitive trading costs.
3. Choose your position and strategy: After deciding on the CFD instrument of your choice, the next step is to decide on your position. If you think the price of your instrument will go up you can open a long position (buy), or if you think the price will reduce or fall you can open a short position (sell). To achieve this decision, you might have to use several indicators, charts, and signals. Another decision to make is the preferred size of trade depending on how much you want to risk and your trading strategy. Choosing a trading strategy can be done by testing the several strategies through backtesting, on MetaTrader forex platforms. It’s important that you vet your preferred strategy in the demo account provided by FXCentrum which will allow you to open without risk. If any of the strategies still look profitable, you can begin trading them in your live account for the ultimate test. It’s recommended that you start with smaller trades and then work your way up to larger trades as you begin to gain confidence in the strategy’s performance and your ability to apply it in a disciplined way when trading a live account.
CFD trading platforms
CFDs can be traded on popular trading platforms such as MT4 and MT5. MetaTrader (MT4 and MT5) is complete with updated tools including over 50 technical indicators and the latest charts to give you a user-friendly and smooth CFD trading experience. You can also trade on either a mobile app on your android or PC.