The Advantages and Disadvantages of CFD Trading

In the financial market CFD (Contract for Difference) represents the contract between the buyer and seller where the seller pays the buyer the difference between the opening and closing prices of the contract. In case the difference turns out to be negative it’s the buyer who pays and not the seller.

Traders have a chance to take an advantage from price moving up and down. In case of prices moving up they can open long positions and while the price moves down similarly they are free to open short position speculating on the market.

CFD trading is realized by individual traders and CFD providers. As there do not exist standard contract conditions each CFD provider specifies his own. It is opened when starting to trade on a specific instrument with the CFD provider.

When closing the position the difference between the opening trade and the closing trade turns out to be loss or profit. In case the CFD does not expire those positions that are remained open overnight will be rolled over.

Since CFDs are traded on margin the trader should keep the minimum margin level all the time to keep the position open. In case the sum of money deposited falls below the minimum margin level the trader will get a margin call and he will have to pay additional money into account. In case of not quickly covering these margins, the positions will be liquidated.

CFDs give you an opportunity to open long and short position. You choose Long Trade when buying an asset and expecting its further rising. In case of Short Trade you sell an asset expecting the price falling as you will be able to buy it back at a cheaper price. In the ordinary share market shorting is hardly possible, however CFDs let you go short as easily as you go long. It provides you with the ability to make profit even if the asset price drops but you trade in the right way.

Advantages of Contracts for Difference (CFDs)

  • Availability to trade on margin which will help you enhance your trading capital
  • Making profit from market rising and falling
  • Lack of taxes and hidden commissions which results in cost reduction
  • Availability of at least 80 stock CFDs, major Equity Indices and commodity CFDs
  • Availability of unique Golden Instruments
  • Providing favorable and beneficial Swap conditions

Risks of Contracts for Difference (CFDs)

  • Availability of trading on margin not only increases the extent of profit but also losses. Therefore you should place stop loss order to escape large losses in case your position moves against you.
  • It is more risky for long term investors; by holding a CFD open over a considerably long time the costs may increase and it would be more beneficial to have bought the underlying asset.

The whole logic of CFD trading is quite simple and has much in common with traditional currency trading. You can find Equity CFDs on Equities, Stock Indices and Commodity CFDs, containing more than one hundred trading tools, on the trading platform NetTradeX.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

RELATED TOPICS
  • Regulation
  • CFD