A Step-by-Step Guide to CFDs

The finance industry is always introducing new investment products for everyone to try. Each of these investment products has its own pros and cons. It’s up to you to decide if the pros are in line with your lifestyle or preference. One of the most popular investment product these days are Contract Of Difference, or what is known as CFD’s.

So, what are CFD’s? What are the important things that you need to know about them? If you are these questions interest you, then you may find this article very informational.

What Are CFD’s?

CFD translates to Contract Of Difference. CFD’s is an investment vehicle that emerged in the 90’s. It’s been for a while now, and it’s a popular investment vehicle for some investors because of its benefits. The term contract of difference doesn’t tell you much about this kind of investment vehicle, so let’s start from the very beginning.

First Things First

CFD is a contract between you and a CFD broker such as cmc markets. The main idea here is that you and your CFD broker creates a contract stating that you get to keep the difference between your initial position and the closing position. Assuming that there is a difference and profit to be made. Another thing to keep in mind that you are basing price movement on an underlying asset. So here’s an example.

You think that stock X is currently valued at 10$ and you feel that it will go up at the end of the day. You purchase a CFD from your CFD broker at 12$. At the end of the day or time period, stock X is now priced at 13$, hence you get to earn 1$. Let’s look at the other hand.

If at the end period the price remains 10$, then the CFD closes and you just lost money. However, you have the option to “extend” the period, but you will be obliged to pay some fees.

Keep in mind that in the entire process, you are actually not owning a stock or an asset. Hence, you are not eligible for any benefits that come with owning a stock, like dividends. So what are the real benefits of CFD?

Benefits Of CFD

In this section, we will cover some of the benefits of CFD.

* Go Long Or Short – in a regular stock market trading, you can only make money if the stocks go up. Of course, you can still make money by shorting a stock. However, this is already considered as “specialized” trading, and it’s also subject to restrictions. In fact, some brokers may not allow you to short. CFD’s are not subject to such kind of restrictions.

Since you are not actually owning a stock or asset, you will are not subjected to the restrictions that apply to shorting a stock. Hence, with CFD’s you are free to go long or short with an asset. This means that you can make money whether the stock or asset goes up or down.

* Leverage – with regular stocks, you have to pay the full amount to own it. For example, if you want to purchase a stock that is worth $1,000, then you will have to put up $1,000. Of course, you have the option of margins, but those margins are nothing compared to CFD’s

With CFD’s, you only need to pay the deposit for the contract. Typically, you only have to pay 5% of the total worth of the stock or asset you want to purchase. Hence, if the stock or asset is valued at $1,000, you only have to put up $50. Keep in mind that leverage can also work against you. Thus caution is advised.

* Round Clock Trading – with stock, your orders are executed when the stock market is open. Hence, you will have to adjust your time to align with the stock market’s opening and closing times. This is drastically different from CFD’s.

With one CFD account, you gain access to stock markets, commodities market, Forex and other markets and indices. This means that you have more options, and you can always trading no matter the time of the day.

Last Thoughts

Certificate of Contract, also known as CFD, is a popular investment vehicle for investors who want to start small. This is because you only need to put up small amounts of money because of its leveraging factor. It also has other benefits like round the clock trading and ability to short. The question is, can you make money with CFD? Like any other investment vehicle, CFD’s takes time, education and dedication to make money consistently. However, if you are willing to work on it, it’s possible to earn good amounts of money via CFD.

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