Contract for Difference trading requires a contract between a broker and an investor in which profits can be made when the asset moves in the same direction as the position that is taken. The asset itself is never owned. However, these contracts are tradable instruments and there are many benefits in online CFD trading.
How Contract For Difference Trading Works
CFDs allow speculation on the direction that the price of an asset is expected to go. It is the difference in the price of the asset when the contract is purchased and the actual price of the asset at the end of the contract that holds the potential for profit. The contracts can be completed on currency, commodity shares, or an index.
Online CFD Trading – The Long And The Short
Online CFD trading allows you to go either long or short. When you go long, you are betting that the price of the underlying share will increase over the term of the contract. In order to close your position at a profit, you must enter a sell order.
On the other hand, going on the short side means that your CFD trade opened with a sell order. The idea is that you plan to profit when the price of the underlying share drops in the larger market. To close your position, you will buy when the price falls to a lower level and you expect that it will soon increase again. Contracts for difference are one of the few ways that investors can profit when the price of an asset drops.
What To Expect When You Trade CFDs
Leverage is used to properly conduct online CFD trading. This means that you will only pay a percentage of the total cost. There is a considerable magnification of the total available profits as well as losses. Expect to pay 1% on indices trades and from 5-10% on shares.
There is no expiration date on CFDs. Until there is enough margin to support closing the trade, they can be moved forward indefinitely. Of course, at the end of each day, the broker will charge or credit your account to reflect any dividends or the daily cost of financing the trade.
The only way to close your Contract for Difference trade is to go in the reverse position. For example, if you started your trade by going short, you must then go long. At any point during regular market hours, you can close your position.
Contract for Difference trades have been rapidly rising in popularity, in large part because they can be traded online in real time. Each day, the cash flows will be calculated and you will immediately know where you stand. In addition, they can be traded on almost every asset in the market including currencies, indices, shares, commodities, and sectors.
Many investors are using brokerage firms that are located online and are engaged in online CFD trading from the comfort of their own homes. While you never actually own any of the underlying assets, there is considerable potential for profit.