CFD trading is an exciting new financial derivative product that enables traders to speculate on future short-term market movements. It also empowers retail traders who want to participate in market liquidity without needing to have their inventory or property. CFD trading also provides the trader with a chance to implement leveraged derivative strategies such as ‘put spread’ and ‘call spread’. The main benefits of CFD trading include:
CFD trading on margin positions allows you to speculate on underlying assets that are difficult to obtain. Most CFDs today are traded as futures contracts. If you are speculating on the underlying commodities, such as oil, the trader stands to gain when the spot contract (the underlying asset) falls in price.
If you are speculating on the underlying currency, the trader stands to profit when the exchange rate goes up. In cfd trading South Africa, the trader stands to profit in either case, if the underlying asset’s price rises or the CFD trader purchases it at the correct price.
CFD contracts come in a variety of forms. There are ‘over-the-counter’ (OTC) CFDs, ‘over-the-counter’ (OTC) flexible contracts and ‘future contracts’ (FTC). CFDs are generally traded over the telephone or on the internet with an independent broker.
CFDs can be traded on futures exchanges like the Commodity Futures Trading Commission (CFTC) or over the counter at major banks.CFD trading is very different from traditional share trading and the CFD market has become very popular in recent years. CFDs are leveraged derivatives, which means they have a higher potential for profit than traditional CFD trading.
As compared with trading shares through shares, brokers will need to provide higher commissions and typically much higher margins. As CFD trading leverage is not available to small traders, they need to trade larger amounts of shares, which translates into a greater potential for gain. When small traders attempt to speculate on stocks, they frequently lose large sums of money quickly as share prices fall in a short period. Leverage allows small investors to take up large stakes with limited risk.
However, for larger investment firms and individuals, CFD trading offers the opportunity to enter into leveraged derivatives markets to achieve high returns on investment.
Leverage on these contracts is typically applied to positions that are based on underlying assets that are normally more volatile and can respond more quickly to changes in market conditions. If an underlying asset moves against the trader, CFDs can be used as a protective tool as they can be sold out to reduce losses.
CFD trading strategies can be complex and technical and there are several books and online tutorials available to teach CFD traders how to trade on the margin. Beginners, in particular, should learn how the markets work before attempting to make a trade on their own.
This will ensure they don’t lose too much money when they first start CFD trading. Before attempting CFDs, traders with years of experience in other types of trading may benefit from a more stable and conservative approach. Learning how to trade Leveraged Derivatives on CFDs may also be useful, especially for novice CFD traders, as they will have more confidence in their ability to execute trades in Leveraged Derivatives promptly.