Those outside of America can profit from price movement without owning the underlying asset in CFD trading. This type of is called contract for difference and does not compute the asset’s underlying value. These are accomplished by establishing a contract between client and broker and does not use an exchange. They offer several advantages over regular trading and have increased this style’s popularity in the last few years.
How this Type of Trading Works
Most CFD brokers only require a 5% margin needed to exchange the value of an asset. This differs from traditional asset trading, which can require up to 50% in a margin account to execute. These have a higher return on investment due to this fact.
For example, a traditional stock trader will need at least $1,117.5 to purchase 100 shares valued at $22.36. A CFD trader would only require $111.8 to cover the cost. If the stock rallies to $22.86, they can sell it for $2,286 for $25.5 in profit or a 2.28% gain. A can make the same transaction, but the realized profit will be much more significant. CFD brokers may be required to buy at a higher initial price, but the money earned is all profit. Stock trades do not include commissions or other fees that many charge to execute.
What are the Advantages?
CFDs offer higher leverage than traditional, meaning there is a higher potential for profits. Lower margin requirements mean less capital outlay is needed, but that can also magnify losses on poor trades.
- Global Market Access: brokers like Easy Markets offer products from all of the world’s major markets on a single platform. You can trade around the clock without worrying about going up against hours.
- No Shorting or Borrowing Stock: markets have rules against shorting and require to own the asset before selling it short. Short selling also has different margin requirements, needing more capital upfront. CFDs can be shorted at any time without borrowing since they don’t own the underlying asset.
- Professional Orders with No Fees: many offer all of the same tools available on traditional brokers. Stops, limits, contingent orders, and if done orders are available. Be careful when signing up for a broker to read the fine print. Many offer guaranteed stops that charge a fee. CFD brokers make their money when a trader pays the spread, so most do not charge commission fees. Traders pay the ask price to buy and pay the bid price to short and sell an asset. The spread difference depends highly on the volatility of the underlying asset, though most spreads are small and fixed.
- No Minimum Requirements: many markets require a certain amount of capital to be available in an account at all times. There are limits on the number you can make if this capital level is not maintained. The market has no such rules surrounding day trading. CFD account holders are free to day trade on any market as much as they wish. Accounts can be funded with as little as $1,000, though the minimum deposit requirement is different among brokers.