A contract for difference, or CFD as it is more commonly known, is a financial instrument which is used by traders worldwide. It essentially allows you to speculate on the price movements of various assets and make investments accordingly, without ever owning the asset. Here is some information on CFD trading, as well as some pros and cons for your consideration.
What is CFD Trading?
CFD trading is a form of derivatives trading which allows you to invest in price movements, i.e. whether an asset will rise or fall in value. If the asset moves in the direction you predicted, you will make a profit, the size of which will depend on the opening and closing prices of it.
Should the asset move against you, then you make a loss. It is important to note that the main difference between CFD trading and regular trading is that, with CFDs, you can profit from the price of the asset going up or down, as long as you predict which way it goes correctly.
One major advantage of CFD trading is the ability to apply leverage to investments, which allows you to multiply your profits if your investment comes through. Another advantage is that, like regular trading, you can research investments and develop a comprehensive strategy for CFD trading, which could help to maximise your chances of making a long-term profit.
CFDs can also be used to hedge investment portfolios, potentially making them less risky. You also pay no stamp duty on any profits you make from CFD trading, so take home more money from successful trades.
Leverage can also be one of the major disadvantages of CFD trading, as it also magnifies losses if the markets move against you. Using too much leverage can seriously damage finances, and is not usually a winning trading strategy.
CFD trading can also be riskier to long term trading strategies, as there is a chance of costs increasing when keeping a position open for a long time. This would mean that it may have been cheaper to buy the asset outright.
Ultimately, CFD trading could well be of benefit to you, provided you manage the risks well and make sure that you have a considered strategy. Be wary of leverage, and only use it once you are comfortable with how CFD trading works, as well as how different markets behave.