What are CFDs? CFD is the acronym for "contract for difference.
" CFDs are financial derivative products that are traded to gain profits from an increase or decrease in stock markets.
They are a type of a contract between the buyer and the seller.
This agreement specifies that the buyer will get an amount from the seller that is the difference between the value of an asset currently and its value at the time of trading.
It is a financial product that is popular with day traders and short term investors.
Though CFDs are permitted in most other countries, they are not permitted in the United States.
Advantages The reason that CFD trading is so popular is that it has various advantages over other trading products.
The most beneficial of these is leverage, which is 10:1 or even 20:1 in some cases.
With this kind of leverage, you can use a small deposit to make larger profits.
As an example, if the seller asks for 10% or 10:1 leverage, it means that by investing $10,000, you can buy CFDs worth $100,000.
Another advantage is that using CFDs, you can easily go short as well as go long.
Thus you can get benefits from both rising and falling markets.
Most CFD providers allow you to trade 24 hours a day.
Thus, you can trade in the evenings, even after the market closes.
You can trade within seconds and you do not have to wait for a dealer to process you order.
In CFD trading, you can gain considerable profits in shorter durations, too.
Moreover, you have many investing options to choose from.
You can invest in commodities, currencies, assets, etc.
Most CFD providers also give you the option to use guaranteed stop loss orders.
Disadvantages On the other hand, CFD trading has certain disadvantages, too.
Leverage may end up being disadvantageous for you at certain times.
If you invest a small amount of money and the stock prices go down by a very high percentage, say 80%, then in that single trade, your loss will be much more than your initial investment.
Slippage may sometimes also turn a profitable trade into a considerable loss.
CFDs are not suitable if there is a large amount of money to be invested or if you want to invest money for a very long duration of time.
There is no investment option that is perfect.
There are pros and cons of all of them.
There can never be a clear winner.
You must decide on the best investment plan for yourself, depending on what exactly you want from your investments.
But you can easily minimize your losses by thoroughly understanding CFD trading, its benefits and the pitfalls.