The last couple of years have shown a growing demand for brokers who offer cfd trading. The reasons for this is understandable, since everyone wants to have access to their favourite instrument in the easiest possible way. But what exactly are CFDs and what are the true advantages?
What IS CFDs
Contract for differences, also called CFDs in short, are basically the difference where a position is entered and exited. Hence the name. It is essentially a contract between the broker and the client. The client does not own anything when purchasing or shorting a cfd, only the promise that the broker will pay them the equivalent of the underlying movement between the time of entry and exit. The same goes for the client as well, in case he has a losing trade, and then they are obliged to pay the broker. In most cases this is automatic as trading CFDs is done via an online platform.
Why CFDs Trading
Many brokers fight over being the “cheapest” alternative to buy stocks, commodities or other instruments. But apart from buy and hold investors, or when it is especially the requirement to own certain stock it is usually irrelevant whether the client owns the asset, or owns only an obligation to pay from the broker. All the trader wants is profit. Therefore CFD trading is a very good alternative to dip into FX, stocks or anything else really as depending on the broker there can be low or even no fees. The reason brokers can do this is because there is a bid and ask spread, as usual. Since a CFD is a contract between the broker and the client, it is the broker who can decide whether he hedges his exposure to the particular instrument or not. And if they do, then it is likely enough to do so on a daily basis, which in turn means a very low cost for the broker as they can do all the buying in selling in bulk, depending on the exposure. These low costs are the reason why it is usually possible to buy a CFD for only the price of the spread and nothing more.
As the broker is on the other side of the trade, it is also very easy to get good execution of the trade. Instead of waiting around for a market order to be filled, depending on size and instrument, many brokers will just simply go ahead and fill the order. Worst case is that they have closed down their exposure, but in many cases they see internal flow and demand of instruments and are able to turn around and offer it to someone else. With the sophisticated trading systems it is even possible to match two opposing orders from separate traders to cancel each other out.
Core Benefit Of CFDs
Another great aspect of CFDs is that they can be set up by the broker to feature any size they want. They can make a Dow Jones mini, gold mini, or whatever they desire. This means ease of access for traders as even the smallest accounts can get exposure to such large instruments as Cocoa or many other commodities. Diversifying a portfolio has never been as easy as nowadays with the broad spectrum of available CFDs. As leverage can be used to trade CFDs, it is very easy to implement risk management strategies to limit losses and to score high gains.
Overall CFD trading has many features, allowing anyone to trade in a way which was previously only reserved for very high account balances. Fees are as low as they can get, execution can be done in the blink of an eye and the inherent leverage offered by brokers mean precise risk management. More than enough to finish the year well in the green on the trading account.