Trading can be a stable source of extra income if you properly approach it. CFDs are a pretty accessible tool that will enable you to get profits from the contract price changes if you invest wisely.
What Is CFD?
Online CFD trading, or trading contracts for differences, is an opportunity to make a profit from the price movement of some asset. And you don’t even need to own this asset! A client and a broker make a contract, which is like a bet.
No stock shares, precious metals or other commodities are directly utilized when making such a contract. In simple terms, you earn money if the price of the financial contract grows. And if not — it’s a definite loss.
Here’s a more detailed explanation:
- Ask price. When you buy some stock, you pay the so-called ask price. For example, Apple’s stock price is $128: if you buy 10 shares, you will spend $1280.
- Fewer extra fees. Then, the broker’s margin comes into play. Typically, the broker’s margin is %50. But CFD demands only 5%.
- Loss. CFD loss depends on the spread at the moment when the transaction is made. Even if the spread is as little as 2 cents, that stock/commodity needs to gain $0,2 first to make it to the make-even-price.
- When the contract hits the bid price, it’s time to reap the harvest. Profits from CFD vary from case to case: it can be as high as 30-40%. CFD is more lucrative due to the risk that you take plus a smaller commission charged by the broker.
These are the nuts and bolts of the CFD trading. Yes, the profit is way higher. But is the risk worth it?
Advantages of CFD
So, these are the main reasons why you could try them:
CFD provides much higher leverage than regular investing. It is strictly controlled and set at a level of 3% (30:1). Though in some cases, it can be 2:1. In practice, it requires fewer expenditures and provides more financial returns.
Compared to traditional investing, CFDs are free to be shorted at any time. Plus, as a trader, you won’t have to cover the borrowing costs — you don’t practically or formally own the traded assets. Besides, some markets have very rigid rules about shorting and demand you actually borrow before doing that.
There are a few thousand markets open for CFD trading. They are available every day of the week, 24 hours a day and include a wide range of contracts: crude oil, gold, silver, cocoa, and so on.
4. Unlimited day trade
Some markets — actually almost all of them — set a minimum capital, with which you’re allowed to perform day trading. Or the dictate that a certain account can make a limited number of trades per day.
CFDs are free from that. There virtually are no restrictions/limitations for day trading — every account owner can make as many contracts as they can afford to. And your starting capital can be a little as $1,000.
5. Accessible brokerage
CFD brokering doesn’t really differ much from the traditional. It offers the same arsenal of tools, which includes limits, stop loss/take profit and even contingent orders. (That is an order that can be executed only when a specific event happens).
6. Wealth of trading options
At the moment, there are various types of CFDs to work with: treasury, foreign currency, index, commodities, and so forth. You can diversify your CFD investments and balance possible risks.
It Is Safe Though?
But you may ask: what’s the catch? Well, there’s none except the predictable risks, from which no investing tool can be insured. Plus:
- Spread. You will have to cover the spread when entering or exiting.
- Speed. The market changes quickly and CFDs require some close and focused attention.
- Brokers. Before trading CFDs, you need to be wise about picking your broker. Only a company with a positive reputation, stable clientele and history can be a worthy option. This is because the CFD market isn’t as regulated as the ‘classic’ stock market.
In other words, great profits go along with some risks and there’s no way around it. But if you’re a disciplined trader who works with a reliable broker company, you have a good chance to succeed in this market.
Now You Know Your CFDs
An instrument with very promising potential, CFD is a great option if your investment capital isn’t that big. All you need to succeed is a close study of the market and a trustworthy broker.