What is a CFD?

A Contract for Difference (also known as a CDF) is a futures contract between two parties. There is one major difference that retail traders prefer. Traditional futures contracts are settled with a physical commodity. A CDF can be settled for the cash difference. A traditional future contracts are beyond many retail traders risk appetite. A CDF is the retail trader’s way of reducing risk and getting involved in the futures market.

 Assets Traded On CDF Contracts?

The assets associated with CDF contracts are similar to those traded by most Forex Brokers. These are assets that most retail Forex Traders like. With CFD’s, a trader can take a long or short position. This means you can make money off the asset going up or down. 

Asset Examples

Foreign and Domestic Equity Indexes
Forex Market (Currency trading)
Precious Metals (Gold and Silver)
Oil (Crude and Brett)

CDF Spreads

Every Forex Trader worries about the spread in the currency markets. A Trading benefit in with CFD’s is traders get a competitive spread. CFD trades allows the trader to save up to 0.5% on spread due to the value of the spread due to lack of a stamp duty tax. Brokers make their money off spreads  in a brokers market.

This is the way a brokers market works:

In a brokers market, the buyer always pays the ask price and the seller always receives the bid price. This means brokers get the in-between spread so the further the bid/ask spread the more commission you pay.

Spot Market Advantage

CFD trading is a trading strategy where traders speculate on real-time price movements. With traditional futures contracts, traders are speculating on a future price. This means there is a strike price that the contract has to hit in order for it to become valuable. In the spot market, a trader enters their position at the market value. 

Many CFD brokers have a broad range of trade sizes available which are for various trading styles. We want to stress that new investors are recommended to use smaller lot sizes. With practice, most traders develop themselves over time and gain experience before they embark on bigger lots. CFD traders have the ability to trade on margin; this means that operators are only required to deposit a portion of the actual deal size in each transaction. Margin trading is significant in CFD trading as it accounts for the largest gains and losses accrued in the trade.

Risks of Trading CFD’s

Despite contract for difference trading growing tremendously popular nowadays, the trade is not without its risks, but these risks can reduce if proper research is carried out.There are a few risks involved while using CFD trading. Some of these risks involved are: the trade is highly regulated unlike in other trades like Stockbroking, where individuals are answerable to a particular licensing board hence traders have to be careful and only carry out business with trustworthy dealers like the CMC markets, GAIN Capital UK. Limited and I.G.

If the market also moves against the trader, the value of investments can fall as well as rise, this can have a severe effect on the value of the investment, and the operator may lose more than his initial margin payment. CFD trading put a high level of risk to the investor’s capital and performed if the trader has money he can afford to lose.

Who Should Trade CDF’s?

Trading in CFD products is not suitable for everybody. We recommend that you do your own research or consult a professional. For example, investors are advised to consult  a professional before trading in the CFD market. We also would like to warn that CDF trading is still beyond many traders risk appetite. You should find a reliable way to manage your trading risk.