An Introduction to Contract-for-Difference (CFDs) Contracts; 3 Benefits of CFD Trading

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A Contract for Difference (CFD) contract is an arrangement between an investor and a CFD broker to trade the difference in the value of a commodity, stock, forex, or any other financial asset between when the trade opens to when it closes. 

This is done to ensure that profit is maximized and losses are limited to the barest minimum. It is also important to have this arrangement with a CFD Trader that understands your trade and transaction patterns.

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Trading commodities, forex, and stock becomes better when the trader includes the services of a CFD broker in the trade. What is Contract for Difference (CFD)? What are the benefits of CFD trading?

The value of  a CFD agreement does not depend on the value of what is being traded, rather, it only concerns itself with the price change from when the trade opens to when it closes.

Basic Facts About a CFD Agreement

  • A CFD investor does not own or co-own any asset. They only get their commission on the price difference of the trade
  • A CFD is an agreement between an investor and a broker where the broker funds the stake for the capital of the investment up to 95%
  • The current margin requirement for an investor opening a position is 5% of the entire stake

What are the Advantages of CFD?

In a normal conventional investment scenario, an investor is ought to provide the 100% of all the capital they are ought to invest with, but with CFD trading, the equity contribution of the investor can be as low as 5% only.

Minimal Trading Costs

With the minimal commitment to the capital of the trade, traders can maximize their potential profit margin. The trader can even use the remainder of the intended capital to open other trades with other CFD brokers. 

For instance, if you want to open a trade with $10,000 for a forex trade, you (as a trader) will be committing only $500 out of the $10,000 while the $9,500 is to be borne by the CFD broker.

Continuity (No Expiration)

Unlike other trade patterns, Contract for Difference does not lose value over a period of time. They also have far fewer restrictions on closing a trade than other types of investments, including futures. Due to this, traders don’t have to worry when setting up long-term spot trades. 

Better Hedging Options

Due to the investor’s minimal capital commitment needed to open a trade, investors have access to funds that can be used to facilitate hedged positions and reduce their risk of losses at any given time.

This is very important for situations where an investor has taken a risky trade position, or when a long-term trade is making losses. Instead of pulling off at a loss and depleting your brokers’ funds, you can open additional trades with a hope of generating earnings that will balance out your initial loss position. When used correctly, a good hedging activity can balance some of the risks that come with CFD trades.

Conclusion

To make sure of their opportunities with this CFD strategy, traders should make sure to follow the best industry practices of CFD trading. 

To make sure that you are on the right trade at all times, always do these:

  1. Do a personal research on investments before implementing a trade
  2. Exercise caution during placements and during long-term trades
  3. Understand the fee payment options of your CFD broker

Contract for Difference does not deplete over time. Also, they don’t have specific expiration dates, and they feature far fewer restrictions on closing a position than other types of investments, including futures.

Information contained on this article are just that – a piece of information. You should not use this to make financial decisions and we highly recommended you seek professional advice from an authorized expert.

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