A contract for differences or CFD enables a trader to exchange the difference in the value of a financial product between the time of the contract’s opening and closing without owning the actual underlying security. Traders make the settlements in cash payments instead of physical commodities or securities. That offers potential for returns equivalent to the underlying securities even if the trader makes a small investment. However, marginal traders can also end up with identical amounts of losses. CFD trading is mainly suitable for day traders who can use leverage to trade the most costly assets to buy and sell. The following article explores the key benefits and risks of CFD trading. Improve your trading strategy by using BitIQ.
Benefits of CFD Trading
Leverage
CFD trading enables you to maximize returns without putting your entire investments at risk. Most crypto exchanges that deal in CFDs, such as Bitcoin Buyer, will allow you to deposit just a fraction of your trade’s total value, known as a margin, to open a position. However, the amount of money you will need to deposit will mainly depend on the position size and your chosen market’s margin factor. The limited risk exposure gives you better leverage to maximize returns from trading CFDs. Also, it’s vital to keep in mind the total profit or loss basis is your position size, not the deposit.
Flexibility
CFD trading involves agreeing to exchange the difference between the opening and closing price of a position. As a result, it offers more flexibility than other kinds of trades. It allows you to switch across markets that are gaining and declining. CFD trading platforms usually list two prices; buy price and sell price. Traders open positions on the buy price if they think the market will attract a higher price. Alternatively, traders leverage the selling price if they suspect the market will decline.
Access to a Wide Range of Markets
The other reason why CFD trading is suitable is that it allows you to leverage multiple markets, including shares, commodities, indices, forex, and cryptocurrencies. It is even more convenient because you do not have to access different platforms to trade multiple markets. Established CFD trading platforms have everything on a single panel, and traders can choose to join the action via a web browser and smartphone apps from anywhere in the world. Some platforms will even allow you to trade outside of the trading hours to maximize earnings. However, remember the market’s opening price may not be the same as that of trading over time.
Risks of CFD Trading
Market Risk
CFDs are derivative assets that traders use to speculate on the underlying assets’ price movements, going long when they believe an asset’s price will grow and short when the prices might tumble. However, even savvy traders agree things do not always go as planned. Changes in market conditions, unexpected information, and regulations may induce rapid turbulence. CFDs are speculative assets, and even small changes may significantly impact returns. Sometimes, unfavorable effects on an underlying asset’s value may prompt the provider to demand an additional margin payment, without which they may end up losing your position.
Counterparty Risk
CFD trading also exposes you to the other parties the provider does business with, meaning risks may occur when the counterparty fails to honor their financial obligations as set out in the contract. The underlying asset’s value becomes irrelevant if the provider fails to meet its obligations. That is why you should only trade CFDs with a reputable broker. Overall, CFD trading has unique advantages and challenges for traders. However, it offers more significant opportunities for huge returns on small investments.
