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 CFD is called a financial derivative whose value is based on the underlying financial asset and that allows a trader to profit from price movements rather than owning the underlying asset. Rather than buying a specific asset, the trader can speculate on how the price of that asset might change. By entering into an agreement with a CFD broker, you agree to exchange the difference in the price of an underlying asset from the opening of a trade up to its closing.
Put differently, after opening a trade at a specific price, you wait for the price to increase or decrease, and eventually, earn a profit or suffer a loss on the difference in the value of the asset at the time the contract is closed.
The profit or loss you make depends on the extent to which your forecast is correct.
HOW DOES TRADING CFD WORKS?
Simply put, trading CFDs gives a trader the opportunity to profit if a market moves up or down. Trading in CFDs is a flexible alternative to traditional trading, giving a trader the flexibility to trade on the price of an asset, rather than buying the asset itself.
By not owning the underlying asset, you can profit from underlying markets rising in price as well as those falling in price. Put differently, as a CFD trader, you can trade when markets are rising or falling, twenty-four hours a day.
With CFDs, traders are allowed to trade from one trading account on the prices of different underlying assets, like shares, currencies, indices, and commodities like oil or gold. Each CFD has a buy price (ask or offer price) and sell price (bid price), based on the price of the underlying asset.
ADVANTAGES OF CFD 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.
- A trader can enter various markets, like commodities, currencies, shares and indices from the same trading platform.
- Provide higher leverage.
- CFD brokers typically offer CFDs with higher leverage than other traditional financial instruments.
- Spare traders from the costs of traditional trading.