Contracts for Difference: Understanding How to Profit From Them

Contracts for difference or CFDs are agreements for paying a particular amount calculated with the use of a change or shift in some figures related to the option. To some extent, a CFD is similar to a futures contract that has one very essential difference. Although futures options often include an underlying asset that is deliverable, a CFD does not have to use this kind of asset.

A CFD is a derivative product which enables you to trade on real-time market price movements without having to own the underlying instrument, the basis of your contract. CFDs can be used for speculating on the market prices’ future movement even if the underlying markets will fall or rise. You have the option to sell or go short. With this, you can profit from dropping prices or perhaps hedge your portfolio so that any possible loss in your physical investment value will be offset. Additionally, with more than 10,000 markets to trade, gaining exposure to markets you cannot access before becomes possible.

How Does CFD Work

With CFD trading, you can choose to go long (purchase) when you think that market prices will increase or short if prices will drop. Thus, when you expect the market or company to experience some value losses in the short term, then you can make use of CFDs to sell at the present and you will see your profits rising. But, when the market will move against you, you can expect an increase in losses. Thus, a CFD is a flexible option to trade in market price movements because it allows you to take advantage of any move. The more the market will move in your predicted direction the more profit you can make.

cfd-work

Is there a Need for a Deposit?

It is imperative to understand that a CFD is a leveraged product, thus you just have to deposit a small percentage of your total market exposure. For instance, if you trade 10,000 shares of a number of the big firms, traditionally, you need to purchase 10,000 shares at a full price. But with a CFD, you need to put up just a small initial payment. This payment can be as low as 5 percent of the overall value. A CFD trading from independent investor will most likely need the help of a CFD trading advisory firm in order to start trading.

Underlying Assets

Global indices, commodities, currencies, whole sectors and stocks are the underlying assets for which CFDs are available. The price to enter or exit CFDs is not restricted. A position on a CFD is likely to be closed at any time during a normal trading day through a second trader for reversing the original long or short position. Opening or closing a trade involves paying a commission. Beyond this, it is likely that terms and conditions will be imposed by the broker.

The Leverage

You should always consider the leverage’s risks. Because your deposit is just a small portion of your total exposure, you may significantly lose more than your deposit when trade doesn’t favor you. But, you can minimize your possible losses through the use of a stop order which will automatically close the trade if it goes against you.

Author: Dean Jones

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Dean Jones has been the author of many articles on CFD trading from independent investor. He has been a trader himself for more than four years now.

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