Online traders generally use two instruments to operate: CFDs and Forex. CFDs are a very suitable and easy to understand financial instrument for a beginner trader. Here, find out everything you need to know about CFD trading.
What is a CFD?
Meaning in English “Contract For Difference” and in French “Contract for difference”, the CFD is a derivative product applicable to almost all financial products such as: stock market indices, Forex and commodities.
CFD trading allows upward and downward speculation of a large number of financial products such as shares, commodities or stock market indices, and this with little capital. It appears to be an excellent complement, but also an alternative to Forex. You can also use a Language interpreter for the translation of the various common terms that you would not understand.
CFD and Forex: what similarities?
In online trading, Forex and CFDs have many similarities. First, CFD trading and Forex trading involve a similar process of execution. Traders have the ability to easily enter or exit the market on upswings or downswings.
CFD and Forex transactions are executed in the over-the-counter, fully electronic market, within a network of banks, with no physical location or central exchange. Also, in CFDs and Forex, the only cost of trading is the spread.
On Forex as on CFDs, the trader does not really own the underlying asset: this is the main similarity between the two types of trading.
CFDs and Forex: what are the differences?
CFD and Forex trading have similarities that novice traders should take into consideration. It involves different types of contracts covering a diverse set of markets such as indices, energy and metals, while Forex offers trading only currencies.
In addition, the CFD trader can select different contracts whose value and currency vary depending on the country of origin and the underlying asset. The Forex trader must trade a design against another by trading uniform lots.
On the other hand, CFD trading is mainly influenced by factors like supply and demand for a given product, while Forex trading is driven by large swings or national political changes.
What are the advantages of CFDs?
CFD trading has many advantages. The leverage effect of CFDs is higher than on traditional investments. The CFD market does not prevent short selling at any time, as the trader does not own the underlying asset.
Also, a trader can enter the CFD markets with low funds and start making money. CFD trading systems entail minimal costs. They provide access to different markets on the same platform.
What are the disadvantages of CFDs?
In CFD trading, the leverage effect is high, but it increases the risk of losses for a trader who makes uncontrolled use of it. In addition, CFD trading is usually done in the short term. This increases the risk of loss.
CFD trading suffers from weak regulation. There are many unscrupulous brokers who operate in CFDs and who give the image of a scam to CFD trading.