The main difference between where a trade is initiated and where it is exited is named a contract for difference or a CFD. Importantly, a CFD is a tradable instrument the reflects the main movement of the primary asset underlying it. Therefore, this allows for both losses and gains to be recognized when the underlying assets sit in relation to the original position taken; however, the actual asset isn't properly owned. The contract is an agreement between the customer and the broker. Trading in CFDs has some amazing advantages; these have rocketed in popularity of the instruments in the last decade.
Features of TradingCFD trading means that you can buy (go long) if you believe market prices will increase, or sell (go short) if you understand that market prices will decrease. Therefore, if you think a market or large company will experience a decrease in their value in the short term, you can use the process of CFDs to go short immediately, with your profits rising in correspondence with any decrease in price. CFDs are extremely flexible and are and alternative to trading the movements of market prices; they permit you to benefit from any shift in the market, irrespective of whether markets have increased or decreased in value.
Hedging PortfoliosIf you know that your existing portfolio may decrease in value, then you can actively use CFDs to offset any losses by short selling. Take a typical example: you have £5,000 worth of shares in EE in your portfolio. You can go short and trade in the equivalent of £5,000 of EE shares through CFD trading. Thus, if EE share prices decrease by 5% in an underlying platform, the loss in value of your share portfolio would be equivalent to that of a gain in your short sell CFD movement. Many potential investors use CFDs to effectively hedge given portfolios, especially in marketplaces that fluctuate unexpectedly.
24 Hour CFD TradingAccessing an account and trading whenever you feel necessary is extremely important. You want to trade wherever, whenever and on a platform that is easy to navigate. Price movements are one of the main reasons for keeping a close eye on fluctuating markets, especially when you are deciding to go short or go long. Therefore, 24-hour access to your trading access account is important if you want to cash in on your assets. This also means CFDs can be used when regular market places have closed for business.
CFD Trading on a LeverageMany CFDs are traded on a leverage, this means you only purchase a small proportion of the total trade value. You, therefore, open up your platform rather than purchasing it in full, this is more commonly known as the margin. A classic example would be trading in EE shares by depositing a small margin of just 5%. Many companies' margins for the UK 100 and Wall Street begin at 0.5%, whilst major currency certified CFDs also start from 0.5%
Furthermore, you can use leverage to portray any return on an investment, as your full trading exposure will be more than the primary deposit used for the trade. Nevertheless, losses are shown in a similar fashion, if the market moves against you and your assets it can lead to losses being more than your primary capital outlay. Effective risk management is essential if you are to understand and use CFDs to their full potential.