Available markets for CFDs
Due to the nature of what CFDs (Contracts for difference) are, they are highly versatile. As you do not have to own any assets when dealing with a CFD, you can take on any asset you please. This means you can easily slip into areas like stock and commodity markets without having to pay the prerequisite price you usually would. The flexibility of these contracts is one of their main selling points and why they have become so popular over the last few years. In this article, we hope to cover how to best use them in two distinct markets. Namely, we will talk about the stock and forex markets. We want to investigate the advantage of using CFDs over dealing with those assets directly.
CFDs in the stock market
The first difference you can notice between stock trading and CFD is the price. Stocks can be quite expensive, ranging into the thousands for some. With CFDs, the price you pay for any stock will be determined by you and your broker. You are only interested in the price change of an asset. Furthermore, you can trade in any market around the world. On a stock trading account, the only area generally accessible to you is your country. On CFDs, it does not matter one lick where the asset is You can access markets like Asia, without contacting any locals. All you have to do is predict a price difference.
Buying one stock on its own could be ok, but if you want to make any significant profits with a stock, you have to buy many stocks. With CFD trading, you do not have to take the risk of using so much of your own liquidity. It is true that when trading in CFDs, you do need to pay a higher up-front cost (around $1,000 at the lowest). However, you can also trade on leverage. Leverage allows you to profoundly expand your potential profits. A broker can allow you to borrow money for a CFD investment. This loan greatly amplifies the investment and profit you make. Once you close your contract, all you have to pay back the broker is the loan and interest; the extra profit is all yours.
The nature of a contract
Due to the fact that CFDs are contracts, they can ensure that your trade goes through. If you are trading in stocks, you will have to ensure that your trading partner is willing to make the deal. This can be quite risky for you, especially if the trade seems very disadvantageous to the other party. Contracts fix this problem quite assuredly. As long as you fulfill the requirements of the CFD, the trade should go through by law.
Using short selling
CFD makes short selling a much easier and more streamlined process. With normal short selling in stocks, you have to laboriously go through each step of borrowing a stock, buying the stock at the right price, and then returning it to your lender. However, in CFDs, you do not actually have to borrow the asset. What’s more, since you are on a contract, the process will be automated for you by your broker. Since all of the logistics of the sale are set beforehand, brokers can make sure it goes as planned.
There are a few smaller advantages for you as well. You can trade live in real-time. With stock trading, by the time you convince someone to trade, the price may have changed. Thankfully with CFDs, the trade goes through immediately.
The flexibility and price of CFDs allow you to try out rather advanced strategies without risking your neck too much.
You can still receive dividends with CFDs. In a long position, as long as you hold the CFD past the ex-dividend date, you can still receive dividends.
There are, however, a few disadvantages we should mention. For one, you do not have the privileges stock owners have. One of these includes voting privileges. In return for owning a stock, companies allow stock owners to vote on company decisions. Their vote has a contribution proportional to the fraction of all the stocks they own. Companies will also give stock-owners the right to information others would not be privy to. This further helps a stock-owner decision on how worthwhile investment is.
CFDs with the forex market
When dealing with CFDs you only have to look at a single currency. When trading in forex, you have to keep in mind the relative price of two currencies. As such, as far as CFDs are concerned, you set a base price, which is the money you invested in. Then you see how the currency value changes relative to the contract price. With forex trading, you will always have to be worrying about how the second currency will be doing as well. This could make the process a bit harder to keep track of.
You should also keep in mind the different influences on each of the markets. It is mainly global and macro-economic events that affect your decision-making in the forex market. For the CFD market, you would be best off looking at how in-demand assets are, especially in the business sectors.
The forex market is quite possibly the most accessible market out there. All it involves is changing one currency from another, so any price is acceptable. However, the CFD market can make things a bit simpler for you.
Trading on margin
You can trade both CFDs and currencies on margin, fortunately. However, as CFDs are contracts, things can get very risky on margin, as you have less flexibility if things go wrong. Usually, you can easily add more funds for forex trading. In CFD trading, you do have margin calls from your broker. However, these are preset and far less flexible overall.
Overall then, trading CFDs on the forex market is not too different than the forex market itself. They are both quite accessible and easy to leave. You can trade margin on both as well. The difference is that CFDs are generally easier to keep track of. However they are also riskier, as you are stuck in a contract, this is especially true trading on margin.
- Test your knowledge of CFD’s options. Take the quiz!