What are CFD Forex contracts?
What are CFDs or CFDs? What are the types of CFD (for stocks, goods, raw materials, cryptocurrency) and CFD brokers? What are the advantages and disadvantages of contracts for difference?
Welcome, friends! Today we will talk about such an important Forex trading instrument as a CFD or a price difference agreement. CFD contracts are a great trading tool. They have high profitability, high leverage , they are cost-effective, tax-free and allow you to invest in different markets. For these reasons, a large number of investors have CFD contracts in their portfolios. The advantages and disadvantages of CFDs are not as simple as they seem. But, as you will learn in this guide, CFDs are just tools with a few rules that you can learn in a very short time.
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What are CFD contracts?
When it comes to popular financial instruments, then you probably will not find another solution, except for contracts for difference. CFD or CFDs are essentially a contract between a trader and a broker for the future price level of the underlying asset. If the instrument is preparing for growth, the investor will place a CFD purchase at the current price in order to later sell this contract for the difference in price. This means that investors can speculate on changes in the price of virtually any asset without its physical acquisition (as is the case with stocks, futures, oil, etc.).
How to trade CFD contracts?
CFD trading is no different from trading currency pairs on Forex. Before investing in CFDs, you should research fundamental and technical analysis, as well as think through your trading strategy. If you open a buy position, this means that you assume that the market has reached the support level and from this point on it will begin to grow again. You sell when you assume that the market has reached a resistance level and from that moment will go down. The deal you place is only a kind of contract that you enter into with your broker. In this case, you do not sell or buy physical assets, as in the stock or commodity market. This is just an agreement on the difference in price between opening and closing a position. And this is a huge advantage of trading CFD contracts.
Unlike stocks and bonds on the stock market or cryptocurrency on the stock exchange, where you can play only on the appreciation rate, in CFD trading you can make profits in both directions, both for buying and selling. The profit from CFD trading is taken from the difference between the purchase and sale prices.
See also what exist CFD brokers .
Types of CFD Contracts
Now, many brokers in addition to currency pairs are actively offering various contracts for price difference. Since CFD contracts are a universal tool, they can be used in any market. Therefore, this is a great alternative for investors who want to expand their portfolio. Consider the most popular types of CFD contracts:
- CFD on stocks. Every trader wants to trade stocks, but to get to the stock market, you must go through a complicated registration, find a stock broker who will be an intermediary between you and the exchange, and also replenish your account with an impressive amount of. Not everyone will go to it. If you are not familiar with the features of trading on the stock exchange, then we recommend you to pay attention to such a tool as CFD for stocks. It is almost indistinguishable from classic stock trading, and has several advantages, such as leverage, trading in both directions, the usual trading terminal MetaTrader 4 and the minimum deposit. For example, the broker RoboForex offers more 9400 CFD on stocks, leverage up to 1:20, deposit from $ 10 and the ability to trade advisors.
- Index CFDs. Another popular CFD trading area are indices, usually the most well-known ones, such as the S & P 500 and Dow Jones. Some brokers even offer the opportunity to speculate on interest rates.
- CFD for raw materials. From oil to gold, from grain to soybeans - the range of raw materials is large, and investors can also trade on the commodity market using CFD. Suppose coffee prices rose by 5% due to concerns about stocks. You want to make money on it and therefore buy a lot of coffee beans, but you need to pay for the rental of the warehouse and transportation costs. However, you can also easily buy CFD for coffee. Thus, you save in the sense that you do not need to physically store the coffee beans, and you will get much more profit. At RoboForex you will find more than 100 CFD on raw materials, including gold, silver, oil, sugar, wheat, cocoa and other products with a leverage of up to 1:20 and a deposit of $ 100.
- CFD on cryptocurrencies. The popularity of Bitcoin and other coins led to the creation of a tool such as CFD on cryptocurrency . Here you get such advantages as trading in both directions with a fractional lot, ease of depositing and withdrawing funds, and a large leverage.
- CFDs on ETFs. ETFs are investment financial instruments combined into one group. A single ETF can consist of several assets — commodities, stocks, securities, and so on. When you buy an ETF, you invest in an entire segment of the economy. Thus, you diversify your funds. If one asset falls in value, then others can grow, providing you a profit.
See also which brokers offer cryptocurrency trading .
Are dividends paid on share CFD contracts?
The holders of CFD contracts are different from the owners of shares of companies, and they are not paid dividends per se. However, during CFD trading, an amendment to dividends is applied if there are open trades on the day of register fixation - ex-dividend date. Moreover, if you have a long position open, then the amendment is charged, and if a short position, then it is written off. Usually, the amount of the amendment coincides with the size of the real dividends per share. See your broker for details.
Benefits of CFD Contracts
- Leverage. The main advantage of CFD contracts is the use of leverage. Its availability gives you, as an investor, the opportunity to earn significant profits in a very short time.
- Tax efficiency. CFDs are more tax efficient than investing in markets where you directly buy a physical asset. Since you are not the owner of a stock or product, you have no reason to pay taxes for what you do not own.
- Flexibility. CFDs are flexible tools that allow traders to open positions in both directions of the transaction. If it seems to you that the stock market is falling, you can immediately go to the side of selling CFDs and get a quick profit.
- Low commissions. In addition to the tax efficiency benefits discussed above, commissions CFD brokers are much lower than conventional brokers.
- No expiration date. CFDs do not have expiration dates like options. You can hold CFD contracts for as long as you need.
Deficiencies in CFD Contracts
When you invest in CFDs, you must take into account all the risks associated with trading in a very volatile market. Let's look at the main disadvantages of investing in CFDs before trading:
- Leverage. Leverage has its pros and cons. If you use leverage correctly, you will get huge benefits. But if you take a lot of risk and open trades in large lots, you can lose everything. The higher your bet, the more you can earn or lose. The secret to successfully investing in CFD is in the number of your positions, not in their size. You can increase your profits by gradually opening deals and distributing your portfolio across different markets.
- High risks. CFD trading is very risky due to the high volatility of financial instruments. Therefore, you must have sufficient capital to cover possible risks and not trade with your last money.
- Additional fees. If you want to trade CFDs in the long term, additional charges in the form of a swap will be charged to your account for transferring an open position to the next day. This may not be very beneficial for long-term investors. If you trade within one day, the swap will not be debited.
See also list of the best Forex brokers .
CFD contracts are an excellent opportunity to invest in various markets (stocks, goods, raw materials, cryptocurrency, and other assets). You get a number of advantages such as using leverage, trading in both directions, low start-up capital, etc. Plus, you can add simple registration with a CFD broker and ease of trading through the MetaTrader 4 trading terminal. However, you should always remember that trading CFD, as well as other financial instruments, is associated with high risks, therefore it is recommended to observe money management and stick to your trading strategy.
See also the article “How to set a stop loss correctly” .