If ordinary stock trading is not for you, you are probably wondering what are CFDs, why are they necessary, and how to make money with CFDs? We give examples, we give definitions and we talk about it in plain language – in the article you will find all the answers.
The content of the article
Beginners are rarely able to invest in CFDs as they are quite complex transactions. But well-known brokers who feel the market well work with such operations. It doesn't just happen. The peculiarity of such contracts is that, without having real assets, you earn from price movements. Let's tell you more!
What is a CFD contract?
Thus, CFD is a powerful financial management tool. It allows you to trade using asset prices instead of buying the assets themselves. This is a speculative trade. You receive the benefits and risks associated with bond prices. At the same time, you don't own those same titles. To put it simply, an investor plays with prices in different financial markets with the help of CFDs. So, for example, he concludes a contract: during the period of validity, the price may decrease and the seller receives the difference. If the price of the asset, on the contrary, has increased, the buyer receives the profit.
There are several types of assets that can be traded: currencies such as dollars or euros, bonds or stocks. It is also possible to buy or sell commodities such as gold or oil CFDs. When opening a position, the investor indicates the value of the transaction and, in his opinion, the likely direction of the price. You can go up and down.
For example, if you think that the price of some stock will go up, he will buy the asset. If it seems to him that it is necessary to wait for a price reduction, he will sell it.
CFDs for diversification
If an investor has doubts and worries about the drop in the price of the shares he bought, he can avoid big losses with the help of CFDs. When selling an asset on CFD, it will gain in a downtrend and make up for losses.
For example, you can see that data indicators indicate that the value of some stocks in your portfolio may decrease. At the same time, in your opinion, the company occupies a good place in the market, so you do not want to completely get rid of the shares. In this case, you sell the equivalent value of the shares in CFDs on the exchange and the value of the real shares is offset by new earnings.
Advantages and disadvantages of CFDs
One of the main advantages is the presence of a high level of leverage, reaching up to 300%. Therefore, it allows you to significantly increase profits. However, it is worth considering that this also increases the risks: the better the leverage, the more you can lose.
Other benefits include:
- Tax flexibility, that is, due to the fact that the owner of the asset constantly remains the same, does not change, investors are able to avoid paying standard taxes. However, in most cases, you will have to pay tax on the profits received.
- Ability to trade in the global market and trade continuously.
- You don't need a big starting capital: you can trade with at least $ 50 in deposit and use big leverage.
- Flexibility and a large number of opportunities: you can trade in bullish and bear markets.
There are also disadvantages. Firstly, it is about the need to pay the spread, that is, the difference between the best selling and buying prices. However, it is still lower than the commission on asset purchases. Furthermore, due to the fact that the market emerged about 30 years ago, it is characterized by weak regulation of the sector, and the government here does not give guarantees to anyone.
That is all! Develop financial thinking with Ilya Sitnov. Subscribe to our newsletter here and on Yandex.Zen so you don't miss out on useful materials.
If you find an error, highlight a piece of text and click Ctrl+Enter.
Read too:
(No ratings yet)
(function(d) {
var id = 'vk';
if (d.getElementById(id)) return;
var el = document.createElement('script');
el.type=”text/javascript”;
el.async = true;
el.id = id;
el.src=”https://vk.com/js/api/openapi.js”;
el.onload = function(){darx.fireEvent(d, 'vk')};
var ref = document.getElementsByTagName(“script”)[0];
ref.parentNode.insertBefore(el,ref);
}(document)); (function(d) {
var id = 'fb';
if (d.getElementById(id)) return;
var el = document.createElement('script');
el.type=”text/javascript”;
el.async = true;
el.id = id;
el.src=”https://connect.facebook.net/ru_RU/all.js#xfbml=1&status=1&cookie=1&version=v2.6&appId=307847689915568″;
el.onload = function(){darx.fireEvent(d, 'fb')};
var ref = document.getElementsByTagName(“script”)[0];
ref.parentNode.insertBefore(el,ref);
}(document));