What Does It Mean to Trade CFDs, and Could It Benefit You?
Contracts for difference, better known as CFDs, are a popular financial instrument preferred by day traders in many countries. The most attractive feature of trading CFDs is the high-efficiency level of this product. Efficient markets are liquid, cost-effective, offer convenient settlement terms and are not capital intensive. CFD trading ticks all these boxes.
In this article, we explore the concept of trading with CFDs and the benefits of CFD trading over cash markets and other financial instruments.
Introduction to CFD trading
Unlike cash markets, also known as spot markets, CFD markets allow traders to speculate on the rising and falling prices of different markets without buying and holding assets. A CFD is a financial derivative that allows you to trade different products without buying or selling the underlying asset.
A contract for difference is an agreement between a CFD broker, such as tixee, and a trader, who could be you. Derivatives are contracts that derive value from other financial instruments, such as stocks, commodities or currencies.
When trading CFDs, the parties agree to settle the contract based on the difference between the opening and closing price of the contract; the price is derived from the underlying asset. If the market goes in the traders’ direction the traders could close the trade and collect their profits,.Of course there is always the risk of ending up with losses.
An open CFD is often referred to as a position and exposes the trader to risk due to fluctuating prices. Because CFDs are merely contracts and brokers are the counterparty, traders can open long and short positions – meaning they can speculate on whether the price will rise or fall.
CFD trading benefits
Many traders and investors consider CFDs much more convenient than purchasing assets and waiting for the price to appreciate, or using other derivatives such as options or futures to speculate on the price of financial markets.
Instant & convenient settlement
CFDs are popular for active trading strategies, such as scalping and day trading, because they are settled instantly in cash, unlike cash markets which are settled a couple of days after a transaction. With CFDs, you can open and close positions multiple times per day as you don’t need to wait for settlements.
Transparent and regulated market
CFD trading is a highly regulated activity, and regulatory authorities scrutinise and monitor brokers. In fact, it is illegal in most countries to offer CFDs without the proper authorisation.
Brokers must submit regular reports to regulators concerning their transactions with traders, including how they derive prices and execute orders. Brokers that fail to submit reports on time, or submit incorrect or misleading information can suffer harsh penalties.
Some brokers take their regulatory responsibilities more seriously than others. For example, tixee trading is authorised by three financial market authorities: Cyprus Securities and Exchange Commission (CySEC), Financial Services Authority Seychelles (FSA) and South African Financial Sector Conduct Authority (FSCA).
Margin trading with leverage
When trading spot markets, such as currencies, stocks or precious metals, traders buy assets in cash, whereas derivatives like CFDs allow you to use leverage. CFD trading is a leveraged product and allows traders to increase their exposure without increasing their collateral. For example, with 1:30 leverage, you can open a position for 10,000 USD/JPY with just $333.33 of margin.
Depending on the regulations in your region, you can access leverage up to 1:500 on certain asset classes. Leverage makes it easier to trade dynamically and not be limited to opportunities due to capital constraints. As the main function of leverage is increasing your exposure, it does expose you to greater risks.
Many instruments are supported
CFDs can be created for almost any financial instrument where brokers can derive prices. Some brokers even offer CFDs of other derivatives, such as options contracts.
tixee offers seven asset classes across its trading platforms, meaning CFD traders have as much choice as possible from a single provider. The broker offers stocks, indices, precious metals, energy products, commodities, cryptos and forex.
Longer trading hours
Many exchanges are only open for eight hours, give or take. In contrast, CFDs are tradable almost constantly, which limits trading opportunities.
CFDs are not exchange-traded products, meaning brokers can offer products outside exchange trading sessions. For example, the FTSE100 closes at 16:30 UK time, and the FTSE100 futures market closes at 21:00 – but you can keep trading FTSE100 CFDs on the tixee platform until 22:00.
Intuitive contract specifications
While considered complex and highly risky, CFDs are relatively simpler than other derivatives, such as futures and options. CFDs do not expire and are automatically rolled over from one day to the next until positions are closed.
Because CFDs are traded over the counter in deals between brokers and traders, you can open and close positions at any time. In contrast, exchange trade products require someone to buy your asset or contract.
Another benefit of trading CFDs is the lower execution cost compared to buying the underlying asset outright in the spot market. Many stock exchanges charge transaction fees, brokers impose minimum order fees, and some countries, such as the UK, charge stamp duty.
Downsides of CFD trading
This article focused on the benefits of CFD trading, but that doesn’t mean there aren’t any disadvantages. Trading CFDs is incredibly risky, and only disciplined and risk-conscious traders have a chance of long-term success trading this product. Before trading CFDs, you should familiarise yourself with the risks of trading leveraged products.
Where to trade CFDs
If you think CFD trading is right for your personality, objectives, and strategy, find a CFD broker that offers exceptional services, including reliable trading platforms, trustworthy account funding methods and a wide range of trading products. All of these are offered by tixee, an international and multi-award-winning broker specialising in forex and CFD trading.