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Jan 12

CFDs: How They Work and the Benefits of Trading

Posted by at 19:43 | Default | Comments(0) | Reads(9299)

CFDs are popular and potentially lucrative trading instruments. This term is an acronym signifying contracts for difference. Any CFD will follow a few basic principles. First, an agreement (contract) is reached between the trader and the broker. This agreement states that the asset will be sold within a specific period of time. The primary motivating factor behind a CFD trade is that the investor predicts movement (either positive or negative) within a specific price range. Should this prediction prove valid, he or she stands to make a tidy profit. Now that we have taken a very brief glimpse into the world of CFD trading, it is wise to examine some of the most pronounced benefits.

Rising or Falling Values



One of the most interesting aspects of a CFD position is that the trader can make a profit even if the price of an underlying asset (or index) falls. This is notably different than more traditional positions when only bullish movements incur revenue generation. So, CFDs are excellent choices during inclement or volatile economic conditions.

The Power of the Leverage



Leveraging is a tool that is often used by astute investors. In essence, any leveraged trade is defined as one where only a portion of the total asset value needs to be purchased. This signifies that entry levels can be significantly lower than would otherwise be possible. Such an opportunity is attractive for those who may not have the available liquidity to afford a larger holding. A word of caution should be emphasised here. While leverages can produce impressive profits, the contrary is just as true. Movements in the opposite direction could very well be associated with considerable losses. Consequently, any leverage should only be performed by those who are familiar with this strategy.

Low Spreads



This advantage has just as much to do with the advent of electronic trading platforms as it is associated with CFDs. A spread signifies how much commission a broker will take with each trade. This proved to be problematic in the past, for higher spreads could easily wipe away the profits of a short-term trade. Such situations have been all but eliminated in these modern times. For example, CMC Markets offers spreads as low as 0.7 points per trade. Not only will greater profits be realised, but short-term positions (for those looking to minimise risks) will prove to be much more lucrative than in the past.

Advanced Trading Platforms



Contracts for difference can be bought and sold through the help of cutting-edge trading systems. So, novices and professional are now able to execute a position from the comfort of home, the office or even via the use of a smartphone. As CFDs represent a truly global market, taking advantage of such liquidity is an obvious convenience. Most trading architecture now incorporates live news feeds, expert analyses, side-by-side chart comparisons and automatic stop losses. These centralised systems will not only shorten learning curves, but their real-time executions are extremely accurate.

Once again, it is important to note that CFD trading is not without its fair share of risks. This is especially relevant when referring to the aforementioned leveraged positions. As a loss can exceed an initial outlay, budgeting is essential. With experience and through the use of efficient platforms such as those offered by CMC Markets, contracts for difference can represent powerful investment vehicles. It should therefore come as no surprise that this is one of the most popular sectors in reference to home-based trading strategies. Please contact CMC Markets to learn about the other advantages that CFDs have to offer.


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