CFD trading is essentially the buying and selling of financial contracts on an online exchange to generate differences. By ‘selling’ a contract, you are essentially purchasing the underlying asset at the current exchange rate, minus the selling price.
When you trade CFDs, therefore, you’re transacting about the movements in the value of that underlying asset. It’s much like buying shares in the stock market – but without needing to physically hold the shares themselves. The key difference is that CFD trading doesn’t require you to own the asset you’re trading – just the right to buy or sell it.
CFD trading isn’t limited to only one set of industries, though. There are CFD providers who deal with all sorts of kinds of financial instruments, including indices, bonds, equities, commodities, and more.
You can even trade CFDs on commodities, options, futures, and currency pairs! You’ll be surprised how many CFD providers also deal with financial derivatives themselves – meaning that you can mix CFDs and CFD trading easily too.
This means CFD trading offers traders the opportunity to profit from the movement of both the underlying asset and its price. For example, if you believe that the price of oil is set to rise in the future, you could purchase CFDs that represent oil stocks on the London Stock Exchange.
In the same way, CFD traders can speculate on any financial instrument. These can include equity markets, indices, commodities, equities, and more. Because CFDs are traded over the counter, this allows small investors to participate in CFD trading south Africa as well as large financial institutions.
One major benefit of CFD trading, which is true of all types of direct market access, is hedging against foreign currency risk. As well as providing traders with excellent returns on their investments, and providers can offset this risk by protecting their margins. To take advantage of this type of protection, most CFD providers offer a ‘Margin Call’ service whereby they guarantee to protect your margin if the market moves against you.
Another advantage of CFD trading is that you don’t need to have extensive knowledge of the markets to become profitable. Most of the work is done for you, providing a streamlined, automated process that can be completed by anyone willing to learn. However, just like any other investment vehicle, you do need to have a good knowledge of how the markets operate, how they affect your portfolio, and where to get cheap premiums.
CFD providers hedge your risk by taking larger positions in positions that are similar to those you would normally take. By using hedged instruments, you can reduce your overall risk while still maintaining a good return on your investment.
Finally, another key advantage of CFDs is that they allow you to trade shares without the use of a broker. Since shares can only be bought or sold via a broker, traders who use CFDs eliminate this cost.
This can be very appealing to small investors who don’t want to pay high commission fees, especially if you don’t have the time to learn how to manage your funds effectively. If you don’t want to risk your capital, you can use this flexibility to stay in control of your portfolio by conducting all of your tradings online from your personal computer.