*Warning – All trading has an element of risk and you should only trade what you can afford to lose. CFDs have the potential to backfire and place you in more debt than you can afford*
Contract for Difference is a popular market instrument. It allows you to earn profits from the price difference of a certain commodity and demands a smaller investment than buying stock would typically demand.
CFD — Simpler than ABC
A Contract for Difference or CFD Forex is like an agreement. You, aka buyer and a broker, aka seller, agree to make a “bet”. This bet is the following: if a price of a certain commodity changes on a certain date in the future, you will earn the difference.
Let’s say, there’s a cocoa CFD. You can make a bet that its price will go up or down. And there will be a deadline, by which your CFD “expires”. That means, if your prediction was correct, you will get the price difference on that day.
But you can also put a CFD up for sale. It can be sold before that X-date, but it needs to show rise or decrease according to your prediction. For instance, if you bet that cocoa will cost $80 on June 17th, you can sell the CFD on June 10th at a $72 price.
Why Is It Profitable?
The great thing about CFD is that you don’t have to own the actual commodity or stock. You just make predictions about their future costs. Therefore, you can access crude oil, gold or Apple shares at a cheaper price.
Other benefits are:
- High Leverage. The CFD market offers a higher leverage (borrowed funds) than traditional market: 30:1.
- Shorting. You can short basically without limitations because you don’t possess commodities.
- Global market. Every major marketplace — from NASDAQ to Deutsche Börse — is available for CFD trading.
- Smaller trading fees. Their amount differs from case to case: the overall fees depend on the type of contracts, your strategy and also on the broker’s policy. But mostly you have to pay the spread.
- Classic tools. You can set limits, use stops and apply other classic order types when trading CFD.
And the best part: there are no strict capital requirements for CFD trading. Unlike conservative markets that set a minimum deposit requirement (at least $5,000-10,000).
There are various CFD types: oil, natural gas, precious metals, indexes, foreign currency, treasury bonds, and so forth. So, you can easily design an individual strategy using all these tools and assets.
Future with the Future Contracts
Interestingly, in 2020 CFD saw a surge in popularity. That’s because when the markets get too volatile and stormy, you still can make money from them.
Just don’t get too greedy and place stops even if it costs extra. The problem is, you can get into debt if the CFDs price hits too low.
A similar situation occurred in February 2020, when many traders went bankrupt and even got in the red because of an oil war. So, before trading CFDs, you need to find a trustworthy broker and study the market closely.