A contract for difference (CFD trading) is an innovative form of derivative trading. It allows you to speculate on the movements of global market prices (usually of financial instruments like stocks, indices, currencies, and bonds). The CFD trading market is open for both short and long terms.
The short terms are those for the trading of one day’s worth of CFDs, while the long term deals with the trading of an entire month or year. There are numerous reasons why CFD trading has become so popular over the years.
The first and most important reason for the popularity of CFD trading is that you do not need to have a large amount of capital to start. The CFD dealer will provide the exact quote for the rate of exchange, which is necessary for CFD trading. Therefore, if you are just learning about CFDs or have a small amount of money to invest in them, then CFD trading is ideal for you.
CFDs also offer some risk management facilities. If, for example, you want to trade in foreign exchange and your margin is not sufficient, then you can get the assistance of a CFD broker, who will ensure that your margin is sufficient to cover the risk of losing the investment.
Another reason for the growth in popularity of CFD trading south Africa over the years is the ease with which it can be used by virtually anyone. CFD brokers are available on the internet, which makes it very easy to start using CFDs if you are a complete beginner.
If you already have some knowledge of the stock and commodity markets but want more flexibility and control over your money, CFDs are ideal because you use a contract for differences rather than a traditional shareholder’s portfolio.
One of the other main reasons why traders prefer CFDs over traditional shares is the flexibility of the underlying contracts. CFDs were first created for smaller companies or those that traded in smaller areas of the market, within a margin account.
Because CFDs are derivatives, they can provide the trader with a greater degree of control than a traditional share. CFDs can be leveraged up to two times or more, whereas shares can only be leveraged up to one. Also, when trading CFDs, the trader can eliminate losses by selling CFDs at an early stage of the trading game and reinvesting the proceeds in more expensive shares of the underlying asset.
Another advantage that traders can obtain by using CFDs is the fact that they are very accessible. Because trading in the CFD market is open to all, you can trade throughout the day. Furthermore, it is possible to trade for the same contract 24 hours a day, seven days a week.
Another advantage of CFDs is the fact that they are relatively liquid and do not create any unwanted delays in trade. A major disadvantage of the CFD market is the fact that they are easily affected by fundamental factors such as economic reports and news releases. This means that the market may retaliate against some traders.