What are CFDs (and Why Should I Trade Them)?
By: Christopher Lewis
CFDs or contracts for difference is a financial instrument that allows trader to participate in various markets that aren’t normally as flexible as the Forex market, but allows them to replicate that kind of leverage and granularity.
The CFD broker isn’t available to Americans, but the rest of the world enjoys this major advantage as there are many different solid choices to trade them. The premise is that you are trading on the price fluctuations of an underlying instrument without actually entering that market. (This is in essence what most forex trades are.) As an example, the Light Sweet Crude market – or CL futures contract – can be traded via the CFD market. This allows the trader to avoid the futures market, and the extremely high margin requirements that come with it.
Also, unlike the futures markets, there isn’t a standardized size that you trade when trading contracts for difference. You can trade as much or little as your account allows. For a lot of traders it is difficult for them to come up with the margin to trade the standard 1,000 barrel contract. In fact, at the time of this writing it takes $4,338 for the margin to trade one contract. When you trade CFDs, you can trade the equivalent of one barrel if you need to – and therefore makes it more reasonable for the average everyday trader.
The CFD markets also replicate the gold and silver markets. CFDs also allow you to trade many of the major stocks on major exchanges, the various large indices around the world, and energy markets like crude oil and natural gas. With the CFD markets out there, you can be an extremely diversified trader even if you don’t have the massive amount of capital to trade some of the larger markets.
The CFD doesn’t actually place an order in the various markets for you; rather it places a trade in one direction or another on a particular price. Normally this is done using a market maker type broker, and you are rewarded via the difference in price from when you enter. (Just like the futures markets.) One massive advantage is in the stock markets, where you can exit a position in the middle of the night unlike the actual exchanges. This is particularly important if bad news comes out in the middle of the night. When that happens – a stock can gap down massively. With a CFD, you can get out of that position long before that would happen as they run 24 hours/day. There is no waiting to see when you can exit!
As you can see, there are a lot of advantages to using these innovative markets instead of the actual underlying ones. The flexibility and security of contracts for difference can be big game changers for traders that find these markets to their taste.
Ready to start trading CFDs? We recommend Markets.com which has an excellent platform and great trading conditions. Start trading!