Most traders have been using increasingly using a ‘contract for difference’ (CFD) day trading strategy. A CFD is a contract between two parties, typically described as ‘buyer’ and ‘seller’, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller).
Due to the leverage and cost of this trade, they make it one of the viable options for intraday and active trades. It is a way to speculate the price movement and you will not have to own an actual asset.
It is the CFD’s performance that will reflect the underlying asset. For profit or loss, they will be established after the underlying asset values will shift the relation to opening position price.
If you will be trading the CFDs with your broker, you will not own the asset that you are trading. It, therefore, means you need CFD broker reviews to identify who is a reputable broker.
Benefits of trading CFDs
- Accessibility
If you find the best CFDs they will be allowing the investors to trade at the world’s major markets. When you have many markets, you can, therefore, trade 24 hours a day. But you must consider the broker’s hours.
- Leverage
The best thing about CFD’s leverage is that it is more compared to traditional trading. However, the rate will depend on underlying assets.
- Less Shorting Rules
There are some markets that will enforce some rules such that you won’t be able to short some of the times. So, they might be demanding for greater margin that will be opposed to being long.
On the other hand, for CFDs, there are no such rules because you don’t own the assets. So, there will be no shorting or borrowing costs.
- Cost
Another essential benefit of CFD is that it incurs some minimal cost. So, most of the brokers will charge little or no fees while entering or exiting trades. However, they will be able to make money after you pay the spread. Besides, the spread size depends on underlying asset volatility. Even though, it’s usually a fixed spread.
- Diversity
Whatever will peak your interest, you will find a CFD vehicle. So, you can, therefore, CFD trading and also utilize treasury, cryptocurrencies, index CFDs and commodities.
Risks associated with CFD trading
Despite the above benefits, CFDs also have some downsides. Here are the disadvantages you should expect:
- Trading On Margin
If the margin will increase the profit potential, it will also be increasing the risks. So, losing sight for the total exposure will be easy. However, if the market will move against you, then the losses you attain can be exceeding the deposits. So, awareness will be vital.
- Regulation
The other risk of trading with CFDs is that its market has no thorough regulation. So, it will be essential to have the correct broker. However, the brokers are supposed to be in a strong financial position and credible. So, trading with CFDs trading will be straightforward. Follow the necessary steps of trading without forgetting reputability of the CFDs broker.
