Tipswalet. What is CFD Trading, and what are the advantages and disadvantages – What is CFD trading? and what about this trading system? This must be a question in your mind because lately CFD is often heard in some informants regarding futures trading.
This is indeed worth exploring further. CFD Trading is considered to have many special advantages compared to another trading. This has increased its popularity in recent years.
What is CFD Trading?
CFD Trading is the trading of a Contract for Difference CFD contract between two parties. In CFT trading they are referred to as buyers and sellers. They will pay the difference between the purchase price and the selling price of some financial instruments. Examples such as stocks, commodities, currencies, and indices are commonly traded instruments here.
Basically, CFDs offers trading products and services that allow you to trade the market through a broker for an asset without having the asset instruments contained in the contract. For example, if you take a “buy” CFDs action on oil commodities, then you don’t really buy oil.
Purpose of CFD Trading
It’s impossible for people to trade CFDs for no apparent reason, right? Well, there are at least two reasons why people choose to do CFD Trading activities. The following are the two reasons why CFD trading is a fold and attracts many people:
- Can get the advantage of buying and selling
- Protection of the Investment Portfolio
As befits trading in a number of well-known commodities, CFD trading can provide benefits from selling actions or buying actions. However, there are more values contained, let’s discuss further.
Can Get Advantages From Buy And Sell
CFD Trading allows traders to choose long positions if the trader believes that prices on the market will rise. Traders can also set short positions if believed through analysis if the price of assets in the market will decline.
If a trader believes that a company or market will decline in the short term, traders can use CFDs to sell those assets today and profits will still be obtained even though the price of assets in the market is declining. Therefore, CFD Trading is a flexible trading alternative because it allows traders to benefit from rising and falling price movements. Although, if the price movement in the market turns out to be different from the prediction, then the trader can still experience loss.
Protection of Investment Portfolios
If someone is concerned that his current investment portfolio will decrease in value, then he can use CFD Trading to close the loss by taking steps to sell. That way, losses due to a decrease in the value of assets in a portfolio can be minimized by obtaining profit from short positions in CFD Trading. At present, there are many investors who have used CFD Trading to protect their assets, especially when price volatility in financial markets is high and risky.
How does CFD Trading work?
Actually, the way CFD Trading works are similar to investments in other financial markets. For example on stock CFDs, you decide to invest in company X shares by buying 100 shares at a price of USD25.26. The total cost to be incurred is USD 2,526. However, in CFD Trading, you can trade on margin, so you don’t have to spend that much money. For example, your broker offers to trade with a margin of 5 percent, you can buy the shares with only USD126.30. When after a few hours later the purchase price of this stock rises to the price level of USD25.76, shares can be sold for a profit of USD50.
However, the bid CFD price can only be 25.74 because the spread size on CFDs is usually greater than the actual stock market (the spread here is the profit of the broker who brokers CFD Trading), so there can be a difference of several cents in profit. Therefore, the profit from CFD Trading shares may only be between USD46 and USD48 only. In this case, it is known that spreads on CFD Trading limit the profit that a trader can get.
Advantages of CFD Trading
CFD trading is the choice of many traders because of the advantages and advantages of trading in general. For more details, let’s see.
Trading with Margins
This system provides much higher margin facilities than on the stock market or real commodity futures markets. The minimum margin requirement on the CFD market is starting at two percent. The margin requirements depend on the assets being traded, for example on stock CFDs, margin requirements can be up to 20 percent. Lower margin requirements make capital needed by traders or investors diminish, so the potential to get more profit. However, it should also be remembered that trading on margin presents a higher risk as well.
Global Market Access From One Platform
Most of the brokers of CFDs offer a variety of products that are traded on major markets in the world, including from the United States, Britain, Europe, and others. This shows that traders can easily trade in many markets using only one platform. In addition, the CFD market generally does not have certain rules related to selling, because an instrument can be sold and purchased at any time.
Professional Order Execution Without Additional Fees
CFD brokers offer many types of orders such as ordinary brokers, namely, stop orders, limit orders and one-cancels-the-Other (OCO) orders. In addition, most brokers do not charge commissions or other fees when traders enter or exit the market. Brokers take advantage of spreads, namely the difference between the selling price (bid) and the buy (ask). Spreads can be small and large, large depending on the current market price volatility.
Disadvantages and risks in CFD trading
Although many are glimpsed by traders, no business has no risk. Likewise, in this way, the system still has several disadvantages. The existence of spreads on entry and exit may reduce potential profits due to the thinning difference in price movements. In addition, there are also other basic risks that you must know about CFD Trading as follows:
The main risk in CFDs is a market risk because contracts on CFDs are designed to pay the difference between the opening price and the closing price of a particular asset. CFDs are traded on margin, allowing traders to use small capital in taking risky positions. The existence of a margin or high leverage facility is very dangerous and has a high potential to cause traders to lose more than their capital if market movements are not in line with predictions. One way to reduce this risk is to use stop loss and apply money management.
A broker is a company that provides assets in financial transactions. When buying and selling CFDs, the only asset being traded is the contract issued by the broker. Therefore, make sure to choose the right broker, which has clear regulatory status and not deception.
In addition, on the alert from cfd-uk.com, there are other advantages and benefits that you have to think about. We will discuss this chapter at a later time in a separate article.
CFD Trading can provide a good alternative for traders, both short and long term traders. However, every trader who enters the CFD market must also weigh the advantages and disadvantages. In addition, it is also important to make a trading plan, because trading with a directed plan will be able to keep traders in the market with consistent trading results.