It means “contract for difference.” These contracts track spot markets and are attractive to small investors because they do not require you to purchase the underlying asset.
You only have to pay the price difference from when you open a trading position to when you close it. Also, you can use leverage, which can help increase the size of your positions even if you have limited capital.
But what are CFDs in trading? Here is a look at the benefits of CFD trading and the best ways to engage in CFD trading.
A CFD is a contract between a broker and a trader. The value of the contract is based on the underlying asset’s price movement.
A CFD broker assists traders with their investment decisions. They act as the intermediary between traders and the market by providing a secure platform and other services or resources needed for trading.
When you buy a CFD, you “go long,” meaning you make profits when the underlying market rises. A CFD long position may be more common, but you can also take the other side of the trade. When you take the “sell” side, you “go short,” taking a short CFD position. If you take a short CFD position, you can make profits if the underlying market goes down.
|Market Goes Up
|Market Goes Down
The ability to easily go long or short can potentially double the number of trading opportunities for traders who would otherwise only be able to go long with other assets.
CFD trading often involves leverage, which grants traders more significant exposure to larger positions without having to hand over the full cost at the time of trading. This allows traders to increase the size of a CFD position even if they have limited capital. However, increasing the size of your position with borrowed capital can also expose you to magnified profits and losses alike.
Here is what happens when you initiate a CFD trade on our website.
- The trader opens a position and either pays or receives money based on the market movements.
- If the market goes down, you must pay the difference between the opening and closing price.
- If the underlying asset increases in price, the broker pays the difference to the trader.
Low trading cost
A major benefit of CFD trading, especially when compared to stocks, is that they have a significantly lower cost. There are three costs involved in CFD trading:
- Spread — This is the difference between the buy and sell price. The buying price is always lower than the selling price, leaving the market price in the middle. The tighter the spread, the more value you can get. That's why we provide products that spread from 0.0 pips.
- Commission — Providers will charge a commission when a trade takes place on their platform. Liquidity providers also charge brokers.
- Swaps — This is the leverage cost, a daily cost that is added or subtracted from an account to pay for leverage.
Leverage trading is another advantage of CFDs. When trading with leverage, you can increase the size of your position, even if you don’t have the required upfront capital. This means that if you were to buy 200 shares of anything, you wouldn’t have to pay the full cost immediately.
Leveraged CFD trading allows you to increase the volume of profits or losses without the initial cost that a traditional trade would require. In certain circumstances, you could control $30 for every $1 in your account.
Other significant benefits CFDs have that other asset classes lack include:
- Global accessibility to investors with limited capital.
- Access to automatic and algorithmic trading.
- Go long or short on a market’s direction.
- Trade across various markets, including shares, forex, precious metals, energies, indices and stock indices. 24-hour, 5-day-a-week trading across several markets.
To learn more about how CFDs stack up against other asset classes, like stocks, check out Our Blog.
What is a CFD trading market option? CFDs track many different asset classes. Here is what you can trade with a quality broker:
- Forex — Currency CFDs track forex pairs. A regulated CFD broker like TMGM offers access to major pairs like EUR/USD and AUD/USD, as well as minor pairs and exotic currencies.
- Shares — Share CFDs track major stocks like Apple, Tesla, Amazon, Netflix and Baidu. Since they track spot markets, CFDs do not have the same divergent pricing features that make futures and options challenging to trade.
- Metals — Gold and silver CFDs offer access to precious metal spot markets. These CFDs can work for day trading or protecting against inflation and volatility.
- Energies — Crude oil CFDs offer access to the volatile global energy markets. You can trade these popular commodities using both technical analysis and fundamental research.
- Cryptocurrencies — Crypto CFDs allow you to invest in digital currency spot markets without the hassle of purchasing the underlying asset.
- Indices — Index CFDs track major global indices, including the S&P 500 and Dow Jones Industrial Average(DJIA) in the US, the S&P/ASX 200 in Australia, and the Nikkei 225 in Japan.
Like any type of trading, there is a learning curve with CFDs. As a popular form of trading, you’ll have access to many features and platforms — including algorithmic trading, which uses EAs (Expert Advisors) and Forex Robots to trade for you. The convenience and efficiency of this trading method make it an appealing choice for investors.
At TMGM, we are transparent about our variable bid/ask spreads and the maximum leverage amounts we offer for each asset class. We offer 24/7 customer service if you have any questions or concerns.
Contact us or open an account to get started trading CFDs. Sign up for an account today and access the global marketing in less than 3 minutes.
Frequently Ask Question
Leverage adjustments can be essential for managing risk. You can reduce your margin in volatile markets to ensure a proper risk-reward ratio and safe position sizing.
For example, if you have a long position in an S&P 500 ETF, you can open a short position using a CFD tracking the same index. If the market goes down, your short CFD position will increase in value, cancelling some of the loss you experience as your ETF drops.
Hedges do not necessarily cancel out the entire loss from a losing trade, but they can limit the downside.
|Tracks spot markets
|Tracks expected price
|Mimics underlying asset
|Can diverge from asset