CFD trading is an acronym of contract for difference. It is a type of trading that allows investors and traders an opportunity to make a profit from the price movement of an asset without owning it. The process is relatively simple as it involves the calculation of the asset’s price between trade entry and trade exit. The process is made possible through a contract between the client and the broker.
How CFD Trading Works
CFD trading involves speculating on the financial markets. However, it does not require the investor to buy or sell the underlying asset. Instead, the trader speculates on financial markets like forex, shares, commodities, and indices without having to own the underlying asset.
When trading CFD, the investor agrees to exchange the difference in asset’s price from the point at which the contract is open to the point when it is closed. The main benefit of this type of trading is that it allows the investor to speculate price movements in either direction. The profit or loss made in CFD trading depends on the degree to which the investor’s forecast is correct.
Cost of CFD Trading
While CFD trading sounds simple and easier than other types of trading, it is associated with several costs. First, the investors pay the spread in order to trade CFD. This is the difference between the buying and the selling price. Second, holding cost is incurred when any position is left open at the end of the trading day. Third, market data fees are incurred to view or trade in specific markets. Fourth, a commission is incurred where applicable for every transaction completed.
Is trading CFD profitable?
CFD trading is profitable and attracts several other profits. It is associated with higher leverage, access to the global market from one place, no day trade requirements, and a wider variety of trading opportunities. However, it suffers several drawbacks in terms of higher risk, weak industry regulation, and traders have to pay the spread. Nonetheless, this is a popular form of derivative trading that enables investors to make profits by speculating what will happen to the prices in the market.