There are many instruments of trade in the financial markets. Apart from stocks and forex, some of the most traded items in the markets are CFDs. Not many people are familiar with CFD as they are with forex and stocks though. The CFD market is one that has been around for a very long time and it has offered opportunities for traders over the years. It is one of the biggest markets with average firms offering around $1 billion per day. In order to understand what these instruments are, you need to look at the basics. Let us look at what trading CFD means, and what the market is all about.
The Meaning of CFD
CFD basically stands for Contract for Difference”. When somebody is described as a CFD trader, it means that they are exchanging these contracts in the market. CFD trading is all about exchanging the value of an asset agreed upon via contract that has been opened, but which will mature when that contract is closed. A trader, therefore, does not actually own any assets, instead, the hold the contract that proves that they are invested in the direction that the asset moves in the market.
How the Market Works
In order to trade CFD, you will need to sign up with the broker in order to access the trading instruments. The basic dynamics of the market are similar to those that you find in other markets. The market can either move down or up. There are two main ways of trading and they are going long’ or going short’. Going long means that you except the value of an asset to rise and thus you proceed to open a buy position. Going short on the other hand is the expectation of the market to fall and a trader thus opens a sell position.
The CFD market incorporates various asset markets. Some of the contracts dealt by brokers can be derivative products of the forex, stocks, or indices markets among many others. The basic process of trading instruments in the market is similar to that of the shares market, but the key differences are in the costs. There is leverage in the CFD market and it is often huge such that losses can be significant. Traders can also go for as many contracts as they want so long as they are available in the market.
Expiry of CFDs
CFDs generally do not expire. When a trader initiates a trade in the market but they want to reverse it, then the best way to do that is by initiating another trade to counter it in the opposing direction. This is done with a trade that is of similar value to the one being closed. The process of closing nevertheless relies on what a particular trader has agreed with their broker. Some brokers prefer to offer different commodities of a similar value. There is no specific time limit as to when you can trade forward. There are also no additional costs needed to close trades.
Why Should you Trade CFDs?
There are many reasons to go for CFDs. The first key advantage of trading in this market is the Direct Market Access. DMA means that traders can trade in a wide range of assets even though they are not directly buying into them. There are over 100 instruments to trade in the market. This is beneficial for traders who might otherwise be locked out of particular markets.
Secondly, CFD trading is usually done by following rising markets or falling markets. This is not the case in many other markets where only rising markets offer opportunities. In addition, the commission rates for some assets are also very welcoming. Traders who want to engage in short-term trades are thus at an advantage when they use the low commission rates.
Trading in the CFD market is also pretty quick. The market is available for 24 hours every day and the various brokers who exist on the market offer quite some inviting leverages.
Risks of the Market and Conclusion
When it comes to the risks in the market, the CFD market is quite similar to most other financial markets. Losses are to be expected when the market moves against your prediction. With that said, the market is quite rewarding for all kinds of traders. Knowledge about the different aspects of the market is crucial for anyone willing to venture.