There are a lot of budding investors nowadays thanks to the latest technologies that have been arriving continuously. Before, trading was only dominated by huge financial companies and banks because of the strict policy when it comes to investing huge capital. But with the emergence of online trading, the industry has started to open its doors to retail traders who cannot produce huge capital just like the ones from big financial institutions.
Trading CFDs was first launched in Romania and only very few considered the advantages of this type of trading. But as time went on, this method of investment started to domineer and became highly accessible to the public. Let’s take a closer look at the facts surrounding contracts for difference.
Contract For Difference (CFD) is a form of derivative trading that involves a contract with the broker. You agree to pay the difference of the opening and closing price if the market takes another route than your trading plan.
Assets Traded in CFDs
There are a couple of assets traded in CFDs, unlike Forex trading that only deals with currency pairs. Some of the most common assets in CFD trading are currencies, shares, indexes, and commodities. After all, oil is considered the most traded commodity and it has a very strong influence in the CFD market. Gold can also be traded and it is also very popular in the market. Most importantly, if you find an asset that’s investable, you will mostly find it in a CFD platform.
Visibility of Other Trader’s Sentiments
It’s not known to many but one of the coolest features of CFD trading is that you get to know the sentiments of other traders. Knowing the sentiments of other traders is something not easy to determine just like other investment options. It may appear like a piece of simple information but it can thoroughly give you important clues as to where your assets are heading.
Buyers and Sellers
Buyers and sellers are important parts of trading. If you are starting in this industry, it is important to know the difference between these two and how they work. For instance, if you are thinking that the price of the oil will go up, you should make a buy order so you can profit from the rising value of oil. But if you anticipate that the price will go down, then it is time to hit the ‘sell’ button.
Proper Use of Leverage
Let’s stick to the oil example above. If the trader is interested in buying 15 barrels of oil worth USD40 each, which is equal to USD600. Normally, you have to pay the full amount which is $600. When trading CFDs, you may use leverage and you just need to pay a fraction of the total amount of the oil you are buying. In this case, CFD doubles the gains but it also doubles the risk because it backfires if your speculations with the price in the market aren’t correct. The higher the leverage, the more risks you have to take.