CFDs allow traders to speculate on whether prices of assets such as stocks, commodities, currencies and indices will rise or fall over time without owning these assets directly. The difference between this type of agreement and traditional investing is that there is no settlement requirement – meaning you don’t have to pay any upfront capital.
Contracts for differences (CFD) is a vast and complicated business. However, we can break it down into some key fundamentals to help you understand it better. You will soon grasp how CFDs work and what they’re used for and open a CFD account.
If you’re interested in trading but don’t know how the process works, this article is for you.
I’ll be showing you precisely what CFD trading is and how it can help build your wealth. If you’re an experienced trader, click here to look at our Australian stockbroker comparison.
The acronym ‘CFD’ stands for Contracts for Difference. CFDs are financial derivatives that allow traders to make speculative investments in markets like shares and cryptocurrencies without owning any underlying assets (i.e., security). The only thing the investor will need to purchase is a contract to trade on that asset’s value fluctuations.
So, if an investor thinks that Bitcoin’s value will rise, they’ll buy a contract that allows them to get the market price of Bitcoin at the strike date and sell it for a fixed higher price. In other words, CFDs are an agreement between two parties to exchange the difference in the value of an agreed quantity of shares or indices from one point to another.
You can use CFDs to make a speculative profit by buying a contract that you think will increase value at a greater rate than your original capital investment. This is known as ‘leverage’ because you’re borrowing money from your broker while making the same kind of returns, you’d gain from owning the underlying asset outright. Let’s see what some of the benefits are:
- You don’t need to hold any of the underlying assets yourself.
- You can open a position on an asset with a minimum amount of capital, which means you can start trading small, which holds less risk as a novice trader.
- Leverage allows investors to trade large sums without requiring them to deposit such high initial margins when buying CFDs.
- You can set Stop Loss and Take Profit orders to ensure that you’re not going to lose all your money, but also don’t miss out on a great opportunity if the price moves in your favour.
- There are no stamp duty or brokerage fees involved when opening a CFD trade.
- You can trade during any time of day as CFDs are an over-the-counter traded financial product. This means that there’s no need to wait for hours until a stock exchange opens before you can buy a contract.
The only cost you will need to keep an eye out for is the spread which is the difference between buying and selling prices of each contract. To give you an example of how this works, let’s say Bitcoin was trading at $8500. If someone wanted to buy Bitcoin through a broker, they would have to pay $8501 because the broker needs enough money to cover its costs of doing business until settlement (i.e., when the trade is closed, and the broker is given back its margin). If somebody sold Bitcoin, then they would receive $8500 as that’s the market price.
So, if you’re looking for a way to get involved in trading but don’t want to become bogged down in the details and just want something that will generate profit over time, then this is it. Why not try out one of our recommended CFD brokers and start trading today? Join a reputable broker today and enjoy exclusive features!
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