Trading as a field
The field of trading is a dynamic one which keeps on evolving at a faster rate every day. It achieves new feats and gets upgraded to newer technologies that improvise the overall experience of the traders. In these days of online trading, cfd trading is gaining a fast hold for many online traders, be it newbies or the professional ones. This article details further about CFD, how does it work, the terms and conditions associated with the same and how one can do the risk management for the same.
What is CFD?
The contract for Difference, in short, known as CFD, is a form of contract between two parties i.e. the buyer and the seller, as per which the seller would have to pay a sum of the difference between the current cost of a commodity and that at the time of contract to the buyer. If this difference comes out to be in negative, then instead it would be a buyer to pay that sum. In other terms, CFD is an agreement for the exchange of the value of the asset from the time of opening of the contract to the closing of the same.
This is gaining a slow pace these days due to the fact that a trader can earn profits from a commodity despite not owning the same, as per the existing market conditions. These days, a number of brokers have started involving themselves in cfd trading and a number of dedicated platforms for the same have also been developed.
How does the entire process work?
The basic aim of cfd trading is to earn profits from the market, surpassing all of its ups and downs. By this process, if one learns about the rise in the value of an asset in the market, then the trader can open the contract for buying of that product. In the reverse case also, the person can open a sell contract to sell the asset during its falling prices. In this manner, the overall trader performance does not only depend upon if he or she is making profits or losses but also on how much is he or she earning as profit or loss.
This form of trading has expanded to different types of markets, starting from Forex to indices, shares, commodities, gold, investment markets etc. It has quite a number of similarities with the conventional trading, with differences in the cost, increased efficiency and added advantages over the latter.
Advantages of cfd trading
cfd trading has the following advantages that have added to its increasing use and popularity: –
- The ease and availability in trading on the margin as per the market standards such that the trader gets to enhance his or her capital investment
- The biggest advantage is the method of earning profits from the market despite having the ups and downs
- Reduction in the costs caused due to cancelling of the excessive paperwork costs
- A wide range of choices available when it comes to the trading plans and execution of the same
- Earning major equity and indices easily
Disadvantages of cfd trading
The following are the disadvantages of trading via CFD: –
- The trading on margin not only increases the profit margin but also increases the various risks for the heavy losses associated. Hence a great deal of consideration on the reverse case also needs to be considered to turn the tides in one’s favour during times of distress.
- A highly risky process for long-time investors who have aimed for huge profits and small room for losses.
- A bit of complexity in the initial process that might turn out to be disadvantageous for the newbies into the field.
The concept of CFD expiry
There is no such fixed definition or norms for CFD expiry. This concept can be simplified in simple words as the selling off the assets at any point of time if one sees falling prices in the same. If one wishes to close a particular position for a commodity in the market, then all he has to do is a trade in the opposite direction such that the commodity gets sold and the trader prevents himself from suffering huge losses. Due to this feature, one indeed does not have to wait for the official date of the expiry of the contract and can trade out the same at any point of time when the situations turn against him or her. This entire process also does not involve any form of additional inputs or resource investment.
Why should one go for the same?
Knowing about the basics of cfd trading, it must be a question in someone’s mind on why should he or she invest or go for this method. The following lists out some of the reasons for which this choice would turn out to be a fruitful one in the longer run: –
- This form of trading provides direct access to the market, which further improves the process and efficiency of the trading process. One can earn huge amounts of equity in this manner.
- With a number of brokers available for the same, one can gain access to a large number of different markets and transact in the same to earn huge profits. Some of these include indices, commodities, gold etc.
- There is no such thing as a market going down in CFD because in that case also one can earn great profits with proper tactics.
- This market remains operational for 24/7 hours and has a forever scope for improvement. This would be the perfect platform for the newbies and short-term
- One does not have to wait for the closing of the contract and hence can sell his or her shares at any point in time to avoid major losses.
The risks involved
The only risk in cfd trading is the market risk and as a result, it can offer equally huge loss as it does for the profit. But this is worth taking, provided for the faster comeback that the platform provides in such cases.
To conclude, trading in CFDs is a good move to have a good hold in the market, but all it requires is a good knowledge on the basics of trading and an equally strong base in the art of applying strategies.