With the foreign currency exchange market valued at over $5 trillion every day, there is no shortage of ways to trade it. One of the less common but increasingly popular variations is the Contract for Differences (CFDs).
CFDs come with a host of advantages for the investor but they are sometimes misunderstood. Here is a quick introduction to the basics of cfd forex.
As the name suggests, a CFD relies not on the value of an asset being traded but the difference in its value between two points of time. Because only the change in value is relevant to the calculation, an investor may purchase a CFD even if they believe its value will depreciate. This is different from actually buying assets where the purpose is to sell it at a higher price.
Essentially, this puts the investor and the broker outside of the realm of the stock, forex, or futures exchange. Their transaction is concluded independently of the actual market in a parallel financial zone. The investor never owns the underlying asset, whatever its value. It is because of this detached, weakly regulated transactional model that CFDs are not allowed in several countries.
The trade-off for the convenience of trading assets of any value is the spread charged by the broker. This means that minor movements in the desired direction may be negated and even ultimately result in a loss-making CFD transaction.
Why Choose CFDs?
One of the main advantages cited by forex CFD investors is that they get higher leverage as compared to regular forex trading. This allows them to enter the market with margins as low as 2% (50:1 leverage), meaning that the capital outlay is minimal but has the potential for higher returns.
In addition, established forex companies allow you to open a CFD trading account with higher investment ceilings, giving you even more trading flexibility.
There has been considerable movement on the international currency markets as a result of the coronavirus-induced economic downturn. While regular forex investors may have been shackled by the negativity, it is an excellent time for CFD forex traders to partner with reputable brokers such as ForexTB. Visit them today for more information.