CFD stands for Contract For Difference and just like its name, this derivative involves a contract that acts as an agreement between the seller and the buyer. In the contract, the seller or the buyer should pay the difference of the opening and closing price, whoever is the losing party. CFD is also known as an advanced trading strategy that must not be taken lightly. Although there is no delivery of physical goods, the trader can speculate on the price of the underlying asset without owning it. Also, the trader will only have to pay a deposit or the percentage of the full asset’s amount to start trading.
Countries That Allow CFD Trading
Not all countries allow CFD trading. For instance, in the United States, they are not allowing the use of CFDs because of the risks that the trader may incur as they trade, especially if they are still new to the market.
However, there are a lot of big countries that allow the use of CFD. These countries are the United Kingdom, Singapore, Germany, Switzerland, South Africa, Spain, France, Hong Kong, New Zealand, Canada, Thailand, Sweden, Italy, Norway, Belgium, Netherlands, and Denmark.
How Much Does CFD Trading Cost?
Some of the costs of CFD include commission, the spread, and financial costs. These financial costs vary from one broker to another. Most of the time, Forex brokers will not ask for commission unlike when trading stocks. When trading stocks, the broker can charge you when you open a trade or when you close it. They will ask the commission for each of these activities.
As for long positions, there will be additional costs for overnight positions. Because of this reason, the trader must consider if he will be willing to hold the position overnight and pay the additional trading costs. Most of the time, traders are being charged with interest every day, for holding the position.
Advantages of CFD Trading
There is higher leverage in CFD trading compared to traditional trading. For the regulations, the leverage is still subject to regulation. Previously, the maintenance margin is very low at 2% or 50:1 leverage. However, the leverage range is up to 3% or 30:1 leverage. This can even go up to 50% or 2:1 leverage. The lower the margin requirement, the less capital outlay but greater returns await the trader.
Variety of Markets
CFD trading allows you to access a whole wide range of markets that are operating 24/7. Global markets like Forex, commodities, indices, and so much more. You can even trade on these markets using one account.
No Rules For Shorting
Some markets don’t allow shorting or there are strict rules that need to be followed when shorting. But this isn’t present in CFD trading. You can short CFD instruments anytime you want without the need to borrow the cost since the trader originally doesn’t own the underlying asset.
No Requirement For Day Trading
Some markets strictly implement a minimum required amount to day trade. Thankfully, CFDs are not bound to any of these restrictions.