What is a CFD?
A short explanation...
Contract for Differences, or CFD for short, is simply a contract to purchase the underlying asset and to sell it in the future, hopefully for a profit. The underlying asset can be any tradable financial assets such as equities, metals, commodities, forex and even indices.
Hence, this makes CFD trading appealing for traders as CFDs give access to markets like spot gold, wheat, nickel, oil, USD/EUR and even equities.
It is important to note that a CFD investor does not actually own the underlying asset. For example, a trader who buys a CFD for AAPL (Apple stock) does not actually own AAPL shares. Hence, if and when AAPL declares a dividend, the CFD holder is not entitled to the dividend. The same goes for a CFD trader who holds Spot Gold CFDs. He or she does not actually own the physical gold.
So, in a sense, a CFD is like a synthetic product based on the underlying asset. Think of it like a futures contract but without any expiration date.
What are the advantages of trading CFD?
Access to a broad range of financial assets through a single broker account
Trading with leverage allows you to buy the asset at a fraction of the cost
Ability to go Long or Short
What are the disadvantages of trading CFD?
It is high risk due to its complexity, leverage and margin calls. If your maintenance margin buffer falls below the requirements, your entire capital maybe liquidated if not topped up within a margin call window.
You could lose more than your entire capital
Hence, before you trade CFDs, make sure that you seek professional financial advice.
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