Contracts for difference (CFDs) trading is perhaps one of the most unique and innovative hallmarks in the financial industry. CFD trading provides the average investor the capacity to speculate in a wide range of financial assets with a minimal initial investment requirement.
Before anything else, let us first define what is CFD trading? Contracts for difference in an agreement between a seller and a purchaser to exchange the difference between the present value of a market at the event of expiration of the time provided. CFDs are basically financial derivatives wherein it allows the trader to speculate on the movement of a current and underlying asset.
The aforementioned assets can be any of the following: currencies, stocks, commodities and indexes. CFD traders can likewise take either a long position (speculating on a price moving up) or a short position (speculating on the price moving down).
One of the primary and chief benefits of CFD trading is the relatively small amount of initial investment needed in order to start the trade thanks to the ability of leveraging an investment. This in turn magnifies both potential losses and gains that are equally possible with CFD trading.
CFDs have a number of benefits as compared with traditional financial instruments such as bonds and stocks. First of all, CFDs only need a relatively small amount of initial investment due to the remarkable ability to leverage an investment. Moreover, CFDs let traders better access in speculating a wider range of financial assets from a global perspective with the use of a single account. Furthermore, CFDs are also in a way advantageous with regards to tax since in the U.K., CFDs are not required to pay stamp duty tax. However, the same are charged with capital gains on any profit that are made.
To become successful with CFD trading, traders need to be mindful of the key financial events wherein such financial indicators will be the basis for consumer expectations. Moreover, traders need to have sufficient background on how these indicators could potentially impact the CFDs they are trading.
Such statistics are very essential indicators of the state of the economy as well as the economic activity. For instance, the higher the number of jobs that better the economic output is easily translatable to higher corporate profits respectively.
It is important that traders understand what figures they would be needing to key an eye on that can affect their trades. Economic indicators can either be pro-cyclical (moving in the same direction as the economy) or counter-cyclical (moving in the opposite direction to the economy). However, if the indicator does not state the relation of the economy then it is regarded as acyclical.
It may appear that plenty of information needs to be kept watched, but the more important advantages of being a CFD trader is that they can better focus on one or a handful of financial assets and grasp better information through specialised advantage.
Finally, whichever CFD a trader may ultimately choose, it is very important to be constantly educating and finding better ways in improving one’s skill in the business of trading CFDs.