CFD or Contract For Difference is a form of trading that has a contract participated by the seller and buyer stating that the difference of the entry and exit price must be paid by the losing party. In CFD, you don’t just profit from the rising price movement but also in the falling markets. You also don’t own the underlying asset which saves you from paying additional trading costs like stamp duty for UK traders.
How Does CFD Work?
Most of the time, traders using this method of trading are those who are more advanced and have known the market for quite some time. Since CFD traders do not own the underlying asset, they don’t trade on physical gold. Instead, they speculate on the price of the commodity, whether it will rise or fall.
Traders in Contract For Difference speculate on the rise and fall of the price of the underlying asset. If they bought a CFD and predict that the price of the underlying asset will go up, they will hold their sell positions. But if the trader believes that the value of the asset will decline, they will sell the underlying asset.
Countries Where CFD Trading is Allowed
Not all countries allow the use of CFD trading, just like in the US. CFD is allowed in over-the-counter (OTC) markets like the United Kingdom, Netherlands, Germany, Denmark, Switzerland, Belgium, Singapore, Thailand, Spain, Italy, France, Norway, South Africa, Sweden, Canada, New Zealand, and Hong Kong.
Australia also currently allows the contract for difference under the strict management of the Australian Securities and Investment Commission (ASIC). However, there are several changes in the issuance and distribution of the contract for difference towards retail clients. The main goal of ASIC is to enhance consumer protection by reducing leverage in CFD that is made available for retail traders. The agency is also targeting the features of several CFD products as well as its sales practices that strengthen the possible losses acquired by retail traders.
Advantages of CFD Trading
Higher leverage. This is probably the main reason why people get interested in it. CFD is known to provide higher leverage for its clients. Previously, it was only offered at a 2% or 50:1 ratio. But nowadays, it is limited to 3% or 30:1 to 50% or 2:1.
Global Access To A Variety of Markets Using One Trading Platform
Almost all CFD brokers offer products from major financial markets in one trading platform. It can also be accessed 24 hours every day.
No Shorting Rules
There are several markets that don’t allow shorting, but not with the contract for difference. With CFD trading, instruments can be shorted without the need for borrowing costs mainly because the trader does not particularly own the underlying asset.
Professional Execution That Doesn’t Require Fees
Most brokers in the contract for difference offer the same types of orders as the ones being offered by traditional brokers. These orders include limits, stops, and contingent orders. The most common way that brokers make money is through the spread that traders have to pay. But there are also some brokers who charge commissions and other trading fees.