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For beginners and seasoned traders alike, the allure of CFD trading is simple to understand.
CFDs are leveraged products which allow traders to gain exposure to large positions, with only a fraction of the initial costs. With leverage, traders can have their cake and eat it, too.
Over the past few years, CFD trading has become a highly accessible means for individuals to get involved in trading.
With CFD trading, individuals can find more ways to generate higher profits with less investment. In this article, we will answer the following questions:
- What are CFDs?
- What are the main advantages of CFD Trading?
- How can I start trading CFDs?
First, what exactly is CFD Trading?
A Contract for Difference, or ‘CFD’, is a contract between a client and a broker, detailing an agreement to exchange the difference in price value of an asset between the start and end of the contract.
A CFD is a type of derivative, which means that individuals can trade without actually buying or selling the underlying asset. Rather, they will buy or sell units based on whether they believe the price of the underlying asset will rise or fall over a given length of time.
Advantage #1: Trading with High-Leverage
Leverage allows traders to open positions worth more than the funds in their trading account. CFD traders do benefit from higher leverage than traditional traders, although leverage levels will vary depending on which broker you choose.
For example, if a trader wants to open a position worth 200 Google shares, they would need to pay the full cost if they were buying the stocks to trade. With CFDs, they would only need to pay a fraction of the price to trade the full value of the shares.
In numerical terms, with leverage 1:50, a position worth $100,000 will require a deposited margin of $2,000. Whereas with leverage 1:500, the same position will require only a $200 deposit!
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Advantage #2: Opening Long and Short Positions
Fearmongers will tell you that trading is a risky business, but then again, no one ever made it big without taking their chances. In actual fact, CFD trading creates ample opportunities for traders to profit, even during times of market downturn.
This is possible because CFD traders can choose between buy and sell options when opening a position. If they believe the price of an asset will increase over a given period of time, they can open a ‘long’ or ‘buy’ position.
Alternatively, if they believe the price of the underlying asset will decrease, they can open a ‘short’ or ‘sell’ position. In both cases, the trader’s profit will be equal to the change in the asset’s price between the beginning and end of the contract.
If the markets move against the trader’s favour, their losses will also be equal to any change in the price of the asset.
While traditional markets have certain rules in place when opening short positions - such as borrowing the instrument or working with different margin requirements - you can short CFDs without any borrowing costs, as the trader is never tied to the underlying asset.
Advantage #3: Access to Global Markets from a Single Platform
CFD Brokers can offer an impressive variety of instruments to trade on, including Forex, Stocks, Indices, Commodities and Cryptocurrencies. Clients benefit from around-the-clock access to global markets, all through a single platform.
Start Trading CFDs with LonghornFX
With LonghornFX, traders get access to over 160+ assets with up to 1:500 leverage through the award-winning MetaTrader 4 platform. As a True ECN/STP Broker, LonghornFX provides clients with premium trading conditions including narrow spreads and low commissions.
Start trading Forex, Crypto, Stocks, Indices and more, with a minimum deposit of just $10 today. Sign up with LongHornFX today!
