CFDs are trade contracts for difference in rates. With the help of this tool, a trader can earn money on a fluctuation of the asset’s rate, where the final profit depends on the number of points that the price passes from opening a deal. When making a contract, you do not need to physically buy an asset, it is enough to conduct a digital operation that will be executed instantly at the moment of closing the deal.
When trading with CFD, the leveraging mechanism is used. With its help, there is an opportunity for trading, when more money is invested in the purchase of the contract than at the current deposit. This allows, in case of successful trading, to get the maximum profit. If the forecast is not justified, then the trader risks losing all or part of his investment.
For trading with contracts for difference, the following underlying assets are used: currency pairs, shares, commodities and indices.
To make it easier to understand what CFDs are, you need to study a real example that practically indicates the efficiency of this instrument. To open a deal, you need to select an asset, specify the investment amount, determine the direction of trade and open a deal.
For example, you think that the asset EUR/USD at 1.2000 has been overestimated and you should invest $ 100 in its downgrade. If after the close of trading your forecast was justified, and the quotes of the asset are, for example, 1.1980 (the market passed 20 points in your direction), then you earned. The profit is calculated as follows: 20 points * $ 100 of investment = $ 2000. In the event that your forecast was not proved, you risk losing the full amount of your investment. It is recommended to use the stop-loss tool to minimize risks in trading operations and minimize financial losses.
The main advantage of CFDs is that the trader has the opportunity to work with a large amount of assets, and also use the leverage mechanism to increase the potential profit on successful forecasting. You have the opportunity to enter the real financial markets without much capital.
An additional advantage of the contracts is no commission fees that are common to most brokers and banks that conduct offline activities.
Transactions for difference are used by investors who seek to increase their capital through financial markets. The CFD tool is ideal for investors who refuse to purchase the underlying asset, focusing only on profitable trading operations. The contracts are both for experienced traders and beginners who do not have experience in investment activities and special financial education. The difference between these types of traders is that an experienced investor can immediately start trading, and a beginner is provided with free training materials. With their help, you can understand the trading process, in order to be aware of opportunities and risks of financial activities.