CFDs, or Contracts for Differences, are financial derivatives that allow you to speculate on changes in the price of an asset without having to own it. In other words, CFDs allow you, traders and investors, to make money from movements in the market without actually having to buy anything.
Trading with CFDs is easy: all you need is a margin account at a forex broker. You can then use your capital as collateral for any trades you place with your broker – this allows you to leverage up to 1:300 on most major currency pairs.
But before we get into the benefits of using CFDs as a trading strategy, let’s take a look at why they were created in the first place.
Why have CFDs been created?
Before introducing CFDs, investors and traders were limited to speculation in financial markets. The most common method was through share trading and investing in companies. However, this does not allow you to benefit from price movements without buying the physical asset that is being traded. What’s more, you need significant trading capital before you can even start. One option that existed was futures, but these are primarily used for hedging purposes rather than speculative trading.
In contrast, with an average starting size of around $200, opening a new forex account with a broker is much more accessible than investing in companies or speculating on futures contracts. In addition, using leverage means smaller trades can have a much more significant effect on your balance. As a result, more people can participate in more types of trades.
Benefits of using CFDs as a trading strategy
Accessibility
You only need $200 to open an account with most forex brokers; there is no need for investments or much capital.
Leverage
With margins at 1:100, your invested amount is magnified by 100 times. It can help traders and investors make a successful trade even if they’re wrong about the market direction
Mobility
There’s no need to hold onto an asset until expiry to benefit from price movements. You can go long or short, buy now and sell later, or wait until expiration before closing your position.
Transparency
CFDs are traded on an exchange; therefore, there’s price transparency. It allows you to make trades without any guesswork as to where the markets will go
Reduced Costs
Compared with share trading and investing in companies, your costs of using CFDs are much lower. You don’t pay a commission or a fixed spread when opening or closing a trade
Speculation
With CFDs, you don’t have to buy anything physical; speculate on the movements of prices. In addition, you can open or close your position within seconds – making it ideal for those who want to trade frequently
Hedging
If you already own stocks but would like protection against a potential crash, you can use CFDs to hedge your positions. It is because when one of your positions falls, the other will increase in value
Trading 24-hours
Not only are markets open on Saturdays, but you’ll also find that they’re more volatile at this time
Leverage
With margins at 1:300, the amount you have invested is magnified by 300 times. It means that if you originally bought an asset for $1,000 with a margin account of $400, it would be worth $3,000 instead
High Returns on Investment
Some traders make up to 10% return per month using CFDs trading
Bottom line
For all the reasons above and more, using CFDs as a trading strategy is gaining popularity every day. Check out the latest CFD trading promotions on our site, and find out how we can help you make the most of your new trading account.
