Introduction to Contract for Difference (CFD)

Many investors are looking for additional ways to trade and invest. One non-traditional form of trading are with Contract for Difference or CFD as they are most commonly called for short. CFDs are a way for European traders to profit from asset price movement without actually owning the underlying asset. They are basically computing only the price change and not the underlying value. They have become popular in recent years. There are sites for trading CFD that offer education and tools to begin your journey with CFD. Because CFD are a non-traditional form of investing, it is important to do your research and learn about their advantages and disadvantages.

Advantages

There are many advantages to CFD. One being that there is global market access. Because many brokers offer products from many of the world’s major markets it allows for you to have access all day/every day. Many world markets also have certain rules against shorting, but with CFD they can be shorted because you do not actually own the underlying asset. Another advantage is that with CFD brokers you are often given the same order types as traditional brokers but often with no or little fees. One thing that can be to your advantage is that with CFDs you are offered a variety of trading opportunities. Brokers offer stock, index, treasury, currency, sector and commodity CFDs to offer variety and diversity in their financial vehicle investments.

Disadvantages

While CFDs offer an attractive alternative to traditional markets, they also present potential pitfalls. One downside to CFDs is that traders pay the spread on entries and exits that take away potential for you to profit from small moves. The spread also decreases winning and increase losses as well. So, while traditional markets expose the trader to fees, regulations, commissions and higher capital requirements, CFDs trims traders’ profits through spread costs. A disadvantage to CFD trading is that the market is not highly regulated. This is a disadvantage to investors because they could find themselves in trouble if not monitoring their investments properly or get into a relationship with a unreliable broker. Brokers in this industry do not need to meet certain regulations enforced by the government but rather credibility is based on reputation and financial position. Because of this you need to do your homework and make sure you are working with a proper broker.

The bottom line is that CFDs offer a great alternative to traditional investment vehicles but it is important to do your due diligence prior to investment.

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