Contract for difference or CFD is a financial instrument by which the trader has the opportunity to earn money, depending on fluctuations in the value of the underlying asset, which is the basis of the contract, by not having an asset itself.
In the role of basic asset can be commodities, stock indices or various goods. The magnitude of earnings of a trader depends on the difference between the opening and closing prices; just like in Forex market.
CFD is a derivative asset. This financial instrument is on the market long enough, but it so happened that it began to gain popularity among Forex traders only recently. This has contributed to a more rapid spread of the popularity of the instrument. Below we will list the most notable advantages of CFD.
CFD trading is much easier than, for example, stocks trading. The reason is that in CFD trading you don’t need to physically transfer the goods. A profit is generated due to the difference in prices for traded assets in different periods of time.
2. Margin Trading
Like in Forex, traders have a possibility to use leverage on CFD trading. If tell simply, the credit. With the help of leverage traders can make transactions with amounts, which are much times bigger if comparing with their deposit. This tool allows trading in the CFD market with a relatively low initial deposit.
3. Short Positions
CFD trading is possible not only by opening the long (buy) positions, but also by opening the short ones (sell). And all this can be done without having available the underlying asset. It is worth noting that it is only recently particular traders got such an opportunity. Previously, such a possibility was available only for big professional investors.
4. Diversification of investments
CFD trading allows Forex traders to diversify more their capital. You should never put your eggs in just one basket. The more tools in the investment portfolio, the lower the risk of loss associated with adverse price changes.
One of the additional benefits of CFD is that Contract For Difference allows traders to profit at the expense of the movement basic asset, avoiding any additional costs that are typical in conventional trade with this asset.