Contract for difference trading, or CFD trading, is one of the easiest ways for traders to take advantage of the global marketplace. It allows the trader to jump in and out of various markets around the world, without the hassles of having a traditional brokerage account. You can just as easily trade a stock index in the European Union, as you can take advantage of a move in the gold markets.
In the past, to take advantage of a move in various markets, you would need to open up multiple brokerage accounts. For example, if you wanted to trade the gold market, you would need a futures account. If you wish to trade stocks in Tokyo, you would need to have a stock market broker that gives you access. If you wanted to also trade the Euro, you would need a currency broker. If you wanted to take advantage of the trend in Bitcoin, you would need a crypto broker as well. With a CFD broker, you have access to all of them.
By using a contract for difference, the trader is simply trying to take advantage of a market going up or down, entering an agreement with the broker to make or lose the difference in price from entry.
CFD trading is a little bit different than the underlying assets that they cover, although most traders will find CFD trading to be much simpler.
Costs of trading
The CFD markets typically will have trading costs in the form of spreads between the bid and ask, or commissions. Sometimes it can be both, but as a general rule, it is a relatively cheap way to enter markets. Some brokers offer fixed spreads, while others will offer variable spreads.
Long or short
CFD markets give traders an easy ability to go either long or short of a contract, enabling them to make a profit whether the underlying asset goes higher or lower. Instead of going to the broker and borrowing a particular stock, all one simply has to do is press the “sell” button on your platform. Professional traders sometimes run into the issue where stocks are “hard to borrow”, meaning that you cannot short them very easily.
Trading size is also a major feature of CFD markets, as it allows the trader to get very granular with the amount of exposure that they are getting. For example, if you were to trade a silver futures contract, that is for 5000 ounces. However, if you use the CFD, you can trade the exact size your account or trade can handle. You can trade as little as 1 ounce, or perhaps even trade 5127 ounces. This flexibility is a huge advantage over legacy brokers.
Leverage is available as well, giving the trader the ability to control larger positions with a smaller amount of margin put up. This can be as much as 100 times the initial margin, meaning that for every $1 in the account, traders can trade $100 worth of a CFD. This is both positive and negative, because the gains may be bigger, but losses will be as well. Margin trading is something that should be done with caution.
A vast array of markets
As mentioned earlier, one of the major benefits of trading CFD markets is that you can jump in and out of various commodities, indices, bonds, stocks, currencies, and even cryptocurrency markets. This gives the trader the ability to trade the international markets and take advantage of correlations as they occur. Depending on the broker, there can be hundreds of potential markets to take advantage of.