A contract for difference represents a form of derivatives trading. CFD trading allows you to speculate on rising or falling prices in rapidly changing global financial markets. The assets could be commodities, currencies, indices, stocks and treasury bills.
CFD trading explained
Some benefits of CFDs trading are that you can trade on margin. The starting point should be to use the CFD calculator to grasp losses and possible profits. You can go short and sell if you think prices will go down. Or go long and buy if you think prices will go up. CFDs are tax-efficient, which means there is no stamp duty to pay. Please note that tax conditions depend on individual circumstances. And may change or differ in various jurisdictions. You can also use CFD trading to hedge an existing portfolio.
How does CFD trading work?
With CFD contracts, you are not buying or selling the underlying asset (e.g. a physical stock, currency pair or commodity). You buy or sell a certain number of shares for a given financial instrument, depending on what you think about price movement. Brokerages offer CFDs on a wide range of global markets, covering currency pairs, stock indices, commodities, stocks and treasuries. For instance, one of the most popular equity indices is the UK 100 Index. This index aggregates the price movements of all stocks listed on the UK’s FTSE 100 Index.
For each point the price of the instrument moves in your favour, you earn multiples of the number of CFD units you bought or sold. For every point the prices move against you, you will incur a loss.
CFDs with limited risk
Often unknown to active investors, CFDs with limited risk allow you to invest in a wide choice of financial markets through a single platform at very competitive prices. Appreciated for their flexibility, limited risk CFDs thus represent a real alternative to traditional brokerage.
What is limited risk CFD?
A limited risk CFD is a contract for the difference in the price of a financial asset between the opening and closing of the contract in the market. It thus makes it possible to take a position on the rise or fall of many financial markets such as shares, stock market indices or even commodities. The particularity of this product is that it has intrinsic protection making it possible to strictly limit losses, position by position. Therefore, the maximum losses can never exceed the amount invested. This protection is ensured by the addition, as soon as the position is opened, of a Guaranteed Stop which automatically closes the position beyond a certain threshold defined by the investor.
CFDs are leveraged products. This means that only part of the total value of the investment will be required from you to take a position in the market. The leverage effect thus makes it possible to enter a position with a lower initial investment. But it’s essential to be aware that the gains and losses will be accounted for on the basis of the total amount of the investment. The use of leverage is therefore not without risk and requires a good command of risk management.
Importance of good broker
Only a few brokers offer limited risk accounts, thus ensuring that none of the positions will result in a loss greater than the amount invested.
Online brokers with good global reputation offer solutions allowing its clients to invest with or without leverage. They offer thousands of financial assets via its multi-award-winning platforms and mobile applications. In addition to its investment products, the best brokers also offer numerous resources and training to enable its clients to take advantage of trading opportunities in different markets and thus diversify their investment portfolio.