How Does CFD Trading Work?

How Does CFD Trading Work?

CFD trading is one of the best ways for small investors to gain access to currency markets, and a whole lot more. Today modern Contract for Differences (CFD) brokers give their clients leveraged CFD that cover stocks, major indices, and FOREX markets.

In addition to being easy to trade CFDs give investors the ability to rapidly trade between asset classes. There is no other kind of financial instrument that allows investors to take on various amounts of leverage across most major asset classes.

What is CFD Trading?

If you want to know more about ‘what is CFD trading’, you are in the right place. At its most basic level, Contract for Differences trading allows investors to trade a derivative contract with a trusted CFD broker.

Most brokers use a trading platform that is easy to use and allows investors to buy and sell Contracts for Differences directly with the broker. If the value of the contract rises, then the investor will make a profit when the contract is sold.

Trading CFDs is pretty simple and can make savvy investors a lot of money.

Are CFDs Different from Stocks?

In some ways, trading stocks is similar to trading CFDs.

Like stocks, CFDs can be traded with retail brokerage accounts. Unlike stocks, CFDs aren’t the equity of actual companies. A Contract for differences represents the value of another financial instrument, like an equity, commodity, FOREX pair.

Unlike stocks, a CFD is purchased from a single broker, who will be your counterparty for the trade. You don’t gain legal title to the equity of a company, and you can’t transfer the ownership of the CFD to a third party in most cases.

How does a CFD Work?

A CFD is simply a contract that represents the value of another financial instrument.

For example, if you buy a CFD that is tied to the value of the NASDAQ 100, you can buy or sell that index in the form of a Contract for Differences.

Let’s say you think that the value of the NASDAQ 100 is going to rise.

At the moment you want to buy the stock index, it is trading at 7452. You can buy the NASDAQ 100 at this level, and if the price of the index rallies 7512, you will be able to sell the CFD and make a profit.

Depending on the CFD broker, you may be able to buy a partial contract, which would require less capital in your margin account. Nearly every CFD broker will allow you to use leverage, which allows you to trade with more money than you have deposited with the broker.

The Benefits of CFDs

One of the biggest reasons why CFD trading makes sense for advanced investors and traders is the leverage they offer.

Unlike margin accounts that limit the amount of borrowed money you can use to a fraction of your capital, most CFD brokers will allow you to use a multiple of your account’s capital.

Let’s say you have $1,000 USD in your margin account, and you want to buy $10,000 worth of NASDAQ 100 CFDs. A $10,000 position in NASDAQ 100 CFDs would represent leverage of 10x, which is possible with most CFD brokers.

It is important to remember that a fall of 10% in your position would wipe out your margin capital. Learning how to use risk management strategies is essential for any CFD trader. On the other hand, a 10% rise would double your initial margin, which is a 100% gain in real terms.

One more benefit is that CFD provides a variety of trading opportunities. Many brokers currently offer index, treasury, currency (including cryptocurrency), stock, sector and commodity CFDs.

Ready to Start Trading CFDs with FXOpen Broker?

There are numerous CFD brokers out there, and it is important to deal with a CFD broker you can trust. FXOpen Broker has a range of account options for traders to choose from.

With micro accounts that can be opened with just $100, FXOpen broker is ready to progress with a young trader as they grow. It also offers full ECN accounts for advanced traders that offer industry-leading fees which take advantage of every pip.

FXOpen Broker more than 90 FOREX pairs, and has added numerous cryptocurrency pairs to its platform as the crypto world gained in popularity. FXOpen Broker also give its clients the industry-standard MT4 trading platform to use, which has a depth of third-party add-ons available to fine-tune it to perfection.

If you want to learn more about all the FOREX pairs, cryptocurrency pairs, and CFDs that FXOpen Broker has waiting for traders, just click here!

 

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