The first thing you need to know about a CFD is what CFD stands for: contract for difference. A CFD is the difference from the entry point of a trade versus the exit point.
It can be used to show how the asset underlying it is moving, laying out the profits and losses in black and white. All of this can be done without the underlying asset actually being owned, because at its core, a CFD is an agreement between a client and a CFD broker. In today’s world, CFDs have gained quite a bit of popularity and for good reason.
The Ways CFDs Work
Say there’s a stock with a price of $25.26. If you were to buy 100 shares at the price stated before, you’d have a total of $2,526. If you were to go through this transaction using a normal broker who uses a 50% margin, you’d have to have a minimum of $1,263 cash outlay from the trader. However, when working with a CFD broker, a common margin is 5%, so the trade cash outlay would only be $126.30. You can see how this would work in your favor.
You’ll find that CFDs have a higher leverage than that of a traditional trade. Typically, CFD market standard leverage can start at as low as a margin requirement of 2%. Of course, margin requirements can go up to 20% depending on what the underlying asset is doing. However, the lower the margin requirement is, the less cash outlay the trader and investor will have to cough up, which means the profit returns could be even bigger and better! You’ll want to be careful not to go too big though, because the bigger they are, the harder you might fall, and I am quite sure you don’t want to lose it all. A good CFD broker will help talk you through things so you can make the best choices.
There’s a ton of advantages to working with a CFD broker. You can enjoy lower margin requirements, have better access to global markets, there’s no day trading rules, as well as little to no fees! If you are looking to get into the world of CFDs, do your research first and find out what path you want to go down before committing yourself to it.
You’ll find everything works out best when you know what aspects will cooperate well with your own trading plan, you don’t want your plan to find conflict! Good luck out there!