The contract for difference (CFD) is a type of financial derivative that is creating a lot of buzz among retail investors. If you’ve heard that CFDs are best left to institutional investors, you’ve heard wrong.
Introduction to CFD Trading
The CFD is a time-limited contract that derives its value from the price movement of an underlying asset. With a CFD, you can bet on the performance of stocks, index funds, commodities, forex currency pairs, or even Bitcoin. You don’t have to bet that the asset price will rise. Alternately, you can bet that an asset price will fall.
This point is crucial because it means you can continue to profit during times of economic distress. For example, many CFD traders did well during the early days of the global coronavirus pandemic. When you learn how to trade CFD contracts, this can revolutionize your investment strategy.
According to the finance experts at Capital.com, “CFD trading democratizes the markets by providing a low entry-level.” Thanks to the CFD, you can bet on expensive stocks with as little as $20 in your account.
Assessing the Risks of Trading CFDs
First traded in the early 1990s, the CFD is a fairly new type of derivative. As a result, the CFD market is only lightly regulated. Be aware of the potential pitfalls associated with less-regulated financial products.
When researching CFDs or any other derivatives, disregard any promises of guaranteed profits. Investing always entails taking on financial risk. Still, most confident, prudent investors can purchase CFDs safely.
Because CFDs aren’t very liquid, you probably don’t want to buy CFDs with the funds you may need to meet daily living expenses.
In addition to being a financial product, the CFD is also a legal contract. Naturally, you shouldn’t sign any contract without completely understanding its nature. If you have any difficulties in this department, you shouldn’t shy away from consulting a legal professional.
Effective CFD Strategies
Through CFDs, you can bet on an asset without owning any of that asset. This lowers the cost of betting on expensive commodities like gold. Many brokers do not charge commissions on CFD trades. However, you shouldn’t see this as an opportunity to dramatically increase your leverage.
Whatever type of financial product you are buying, you should never underestimate the risks of trading on margin. Until you gain plenty of experience, it’s best to view your investment income as supplemental income, not as your primary source of income. It takes time and studies to master the ins and outs of the market.
If you really want to do well through CFD trading, you’ll want to work with an outstanding broker. Thanks to new apps like Robinhood, broker commission rates have dropped greatly in recent years. Some brokers even allow you to create free accounts and make demo trades. Advocates are currently lobbying policymakers to fully allow CFD trades in all major jurisdictions.
Though the CFD is a fairly new type of financial product, it has already helped thousands of investors earn vital income.