Many people who want to explore CFD (contracts for difference) trading aren’t sure where to begin. They might already realize that CFDs offer numerous advantages over most other kinds of security dealing but aren’t sure how to make the switch or learn more about the topic. Luckily, there are plenty of ways to acquire the essential knowledge, set up a brokerage account, and get started with a new way of buying and selling.
What’s so different? The primary characteristic of contracts for difference is that traders don’t own the underlying assets, as they do when taking positions in stock transactions. But there are several other pertinent aspects of CFDs that are important to understand, like their origin and who uses them. If you’re ready to get going with CFD trading, brush up on the basics, pros, cons, and everything you need to know to protect your capital. The following points offer a jumping-off point.
Origin of CFDs
CFDs been around for about 30 years. Two traders originated the concept that was soon popular among hedge funds who wanted to get exposure to shares without actually having to own them. From there, many brokerage firms began offering these new investment vehicles to their institutional clients. Eventually, even retail clients could purchase them.
Who Uses Them?
Nowadays, CFD buying and selling is still conducted by individuals, hedge funds, banks, and other organizations who want to take part in the potential upside of the securities markets without owning assets. In fact, most individuals who are enthusiastic about the contracts choose them for that very reason.
Pros
One of the chief features of a CFD is that the trader need not own any of the underlying assets. But that opens the door to another central benefit, namely that investors can buy contracts on shares that would otherwise be out of their price range. If ABC stock is so expensive that you can’t afford to buy one share, you could buy a CFD on it and speculate as to the direction of the price. Other important advantages include the ability to use high amounts of leverage.
Most brokers who offer CFD-based trading allow customers varying amounts of leverage to magnify potential gains and losses. Plus, those same brokers tend to make numerous markets available to their clients who want to trade CFDs. It’s easy to go short on particular assets via contracts for difference. There are no shorting rules or requirements. All the trader has to do is choose the asset to be shorted and pay the bid price of the contract. For stock traders, shorting is a highly complex affair that includes numerous rules and requirements.
Cons
Magnified gains are great, but it’s essential to remember that a leveraged trade also magnifies losses. That’s just one of the reasons to employ carefully placed stops when making any trade, especially one that includes a leveraged contract for difference. While most brokers don’t charge fees on transactions, customers pay the spread, which serves as a type of built-in fee on every transaction. In some countries, the entire marketplace is not well regulated, which means that account holders need to choose their brokers carefully.
