CFD account or Contract for Difference refers to an agreement provided in a futures contract which stipulates how differences in a settlement should be completed that is via cash payments and not through delivery of goods or assets. It is considered as one of the easiest methods of settlement since gains and losses are settled through cash.
CFD is a renowned form of derivative trading where traders are able to determine the rise and fall of prices for fast moving global financial instruments for example indices, stocks, currencies and commodities among others.
How A CFD Account Works
When it comes to Contract for Differences trading, traders and investors will purchase units of a specific asset. For the purchase to be completed, traders and investors must speculate whether the prices will rise or fall.
Securities offered under CFD include shares, currency pairs, commodities, indices and treasuries. When traders and investors speculate that the price of a particular market will rise, they will select buy which results in profits due to price increase.
If the prices fall, traders and investors will incur a loss.
For example, if you speculate that the price of a company’s stock will rise, you may decide to purchase 5 CFDs at a price of $50. If the market was to rise a few points, you can close your position thus making a profit. If the price of the shares falls, then you will end up losing.
Costs Of CFD trading
- Holding costs — What you need to know is that any open positions in a customer’s account are subject to holding costs. The cost can either be positive or negative. This usually depends on the direction of one’s position as well as the applicable holding rate.
- Spread — This refers to the difference between the buying and selling price. Traders can only enter a trade via the quoted buying price and exit via the quoted selling price. What you need to know is that the narrower the spread, the lesser the price movement in your favor which would mean making a profit. If the price direction moves against you, then you will experience a loss.
- Market data fees — To trade or view price data for CFDs, you must subscribe to the relevant data fees.
- Commission — When trading CFDs, traders and investors are required to pay commission fees. This is a separate charge.
Advantages Of CFDs
- They provide a higher leverage than traditional trading
- Lower margin requirements means less capital and higher returns
- CFD account owners can receive cash dividends thus increasing their returns
- Traders can access any market easily
- Short selling rules don’t exist in CFD markets
Disadvantages Of CFD
- Making payments during entries and exits spreads lowers chances of profiting from small moves
- A broker’s credibility is based on reputation and not their financial position
- CFD trading is not suitable for buy and hold trading positions
It is important to note that a CFD account allows investors and traders to trade securities without actually owning them.
As a result, traders and investors are able to benefit from the asset while incurring minimal risks. There are different financial instruments you can invest in and some of them include shares, commodities, indices and currency pairs. Remember, losses can exceed your deposits so, make wise decisions!