A great deal of financial development has been witnessed in the world since modern advancements took place. A result of such developments is that Forex and CFD trading has become quite popular amongst traders due to factors such as ease and accessibility.
The choice of the right Forex and CFD broker becomes key if you’re going to invest in Forex. So, to assist you, Capital.com review lists the reasons you should invest in CFD trading.
What Are CFDs?
CFD is an acronym for “contracts for difference”. This type of trading allows traders to make investments based on where they predict assets will go rather than buying those assets and selling them when the time is right. Traders use contract for difference to predict whether an asset will gain or lose value. The contract is deemed complete after a certain period of time, after which the investor either gains a return depending on the outcome, if he or she was right or loses it.
The difference between the price of the asset when you entered your position and when you closed it is what determines whether you made a profit or lost money. Profits are higher when the market moves in accordance with expectations. There is also a possibility of losing the position if the position moves against you. A CFD doesn’t require you to pay the full value of the position, instead some fraction is reserved, also known as margin. This strategy is called trading on margin.
Let’s say stock ABC is trading at 10 USD. The company’s price looks like it’s about to rise so you buy 1 lot of ABC (One standard lot is 1000 CFDs).
Why you should invest in CFDs.
CFDs offer the advantages of giving you access to an underlying asset without spending as much as purchasing it directly, ease of use, and versatility.
Profits can be generated through both rising and falling markets.
You can either buy or sell CFDs and take a position on both sides of the market. For traders who want to take advantage of falling asset prices in volatile markets, short selling is a particularly popular strategy.
As a result of the leverage effect, you can utilize your capital very effectively
Low transaction costs make the process efficient.
In light of CFD positions’ potential volatility, many brokers offer a range of options when it comes to trade size. In this way, brokers cater to a wide range of traders, especially novices and casual traders who wish to experiment with investment strategies while limiting their risk.
Since most CFD trades do not have an expiration date, you can hold positions for a long time. Position trading strategies are used by some traders to trade instruments over the long-term rather than make direct investments.
You should note, however, that just as you can experience a high percentage return with CFDs, you can experience a high percentage loss if the stock goes down.