Beginner’s Guide To CFD Trades
Have you ever wondered how and where to trade forex CFDs? In this article you’ll find an introductory guide on what CFD trades are, where to find them, as well as what opportunities and risks that await the interested investor.
What are CFDs?
CFDs, which is an acronym for contract for differences, is a speculative trading method. It is an agreement between the buyer and the seller about the price value of an asset. The buyer agrees to pay the sum between the current value of the asset and at the time of the contract, hence the “difference”. The value of the CFD therefore does not lie in in the value of the underlying asset, but rather in the price change during the period of the trade. This type of trade is most commonly used for foreign exchange (forex) trades, where crypto works as a viable pairing currency, but also for stocks and other forms of trading.
When an investor trades using contract of differences, they never actually own the underlying asset. Instead, a CFD trade can be likened to a calculated guess or a bet about whether the value of the asset will rise or fall in the near future. It is this price change that results as revenue for the investor. This is also the reason why this method is mainly used by experienced traders.
Where to use CFDs
Contract for differences trades are commonly used in areas such as foreign exchange trades. Here investors bet on whether a certain type of currency, such as Bitcoin or the Japanese Yen currency, will rise or fall in value. On certain forex trading websites, it is possible to make your trading pairs crypto/fiat or vice versa rather than just fiat/fiat currencies.
It is also good to be aware that contract for differences trades are not legal everywhere. While legal in most developed industrial countries, it is banned in the United States. This is because the purchase of the price difference rather than the actual asset makes it difficult to pass as a regulated exchange, and is considered an “over-the-counter” trade.
Opportunities and risks
The advantages of contract for differences trades are many, but volatile. The investor, if they have made a good prediction, can make big earnings in the difference from the entry to the exit of the trade. Additionally, the investor doesn’t have to pay the same amount of fees and commissions as they are not buying the underlying asset. Because of this, CFD trading can sometimes be more cost-efficient.
However, a disadvantage of this type of trade is that it also results in the immediate decrease of the investor’s initial position as the size of the spread becomes limited. Furthermore, this type of trade does not have strong industry regulations. Rather than national standards and requirements on liquidity, CFD brokers’ legitimacy is based on reputation and financial standing. Therefore, CFD trading requires more preparatory work from the investor compared to other types of trades.
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