CFDs or Contracts for difference are derivative investment products where a trader can infer the price movements of commodities, stocks, cryptocurrencies and market indices.
You can also trade CFDs on currencies. However, in Australia, we commonly refer to this as forex trading.
Since you are trading contract, CFD traders can lose and profit money regardless of prices going down or up instead of holding the underlying asset. For that reason, CFD trading constantly becomes more favoured during times of market volatility, as vendors aim to profit by “shorting” the market when it declines.
The Advantages Of CFD Trading
- CFD contracts do not necessarily set expiry dates, indicating you can lock out your position when you decide.
- You can typically access complimentary demo accounts, as well as trading tools and charts through your agent.
- You can go short or long; hence, you can profit (and lose funds) in dipping and rising markets.
- CFDs let you speculate the global markets and wide range of financial products that you may otherwise be unable to explore.
Some of the most typical markets you can access with Contracts for Difference are bonds, shares, cryptocurrencies, forex, indices and commodities like gold or oil.
If you plan to trade CFDs, you should completely understand how the CFD functions and the underlying asset. However, if you do not have experience in trading shares, it is perhaps not a sound decision to buy CFD stocks.
How to decide if CFDs are suitable for you
Due to the high level of risk and complexity involved, Contracts for Difference will not be suitable for most traders. In the following situations, CFDs could be ideal for you:
- You are a skilled trader.
- You have a high forbearance to risk and are not at all risk-averse.
- You have a robust understanding of CFDs and several markets and financial products.
- You possess fundamental legal expertise to comprehend the complexity of Contracts for difference.
- You acknowledged the actions available to mitigate your risk and are skilled using these tools, for instance, stop-loss orders.
- You can afford to forfeit a significant amount of money and are not interested in owning the underlying assets.
- You have performed necessary research – trading CFDs is not a decision that should be taken hastily.
Potential Risks Of CFD Trading
You Can Lose More Funds Than Your Initial Capital. In CFD trading, there is a possibility of losing more money than you started with, indicating you even owe the CFD vendor money, often hundreds of thousands of dollars.
CFDs Are Complicated. They are very confusing and intricate products.
CFDs Depends On the Market’s Performance. Even though you do not hold the underlying assets, Contracts for difference are yet affected by market conditions. This can raise the risks even more in a volatile market.
Suppose you are not sure about CFDs trading or diversifying your investment portfolio. Connect for a no-obligation consultation with our finance experts to explore the available opportunities.
