CFD Trading – What is it?

Essentially, the difference between where a trade starts and where it end is known as a contract for difference or CFD. CFDs are tradable instrument which reflect fluctuations of the asset lying underneath. It shows gains and losses when the underlying asset fluctuates in relation to the original position taken. However, the actual asset is never owned because the agreement is between the customer and the broker themselves.


Advantages of CFD Trading

Higher leverage: CFDs allow a much higher leverage than other areas of trading. Traditional leverages in the CFD platform start from as low as 2%, but can go up to 20%, dependent on the value of the underlying asset. Lower margin outlays mean that initial capital invested can be less; this can pave the way to greater returns. Nevertheless, increased leverages mean losses can be astronomical should the market not go in your favour.

Worldwide access to markets from one platform: Many CFD brokers provide products that can be traded on all of the globe’s major platforms. Essentially, this means client can access and trade products in any market, all from their broker’s platform.

No Shorting Regulation or Borrowing Stock Certain Markets: These particular markets have regulations that do not allow shorting at particular periods and require the trader to use the instrument before actually shorting it, or have different margin specifications for shorting in addition to going long. The CFD Market does not have any of the aforementioned rules. Thus, an instrument can be shorted at any given time, and since the underlying asset is not owned by a broker or client, the borrowing or shorting costs are classed as nil.

Professional execution with no attached fees: CFD brokers provide many services, much like traditional brokers, as they provide limits stops and contingent orders. The contingent orders are services such as ‘one cancels the other’ or ‘if done’. Some brokerage firms trading in CFDs even offer something called guaranteed stops, but there are heavy fees linked to this service. However, very few brokers actually charge a fee for CFD trading and they also do not charge commissions or any add-on fees for additional services provided.

The broker makes their money by the trader purchasing the spread at an agreed cost. Essentially, to purchase, the trader must buy at the asking price and to go short, he/she must take the agreed bid price. Dependent on fluctuations within the underlying asset the purchased spread may be small or large, although it is usually set at a fixed rate.

CMC Markets are experts in the field of CFD trading, they provide professional effective advice to both clients and brokers who are looking to move into the platform. Their information is both up-to-date and pertinent, with practical examples to ensure success for those who choose to use their services.

No day trading stipulations: Often, trading markets require a minimum amount of capital outlay in order to trade, or they place limitations on how many trades can be made in a given day. Interestingly, the CFD market is not tied to these restraints and traders can trade freely, if they choose to do so. Accounts can be opened from £500, although £1,000 is often the required starting deposit.

Multitude of trading options: The CFDs market is awash with a range of different products: stock, index, currency and commodity, to name but a few. Thus, traders have many different financial arms and can look at different CFDs as alternative ways to trade.