Forex and CFD trading | What are CFDs ?
The abbreviation CFD derives from "Contract for Difference", which means something like contract for difference. CFDs are traded over-the-counter, with the CFD dated
broker is offered. The price of a CFD depends on the price of the underlying instrument. This can be a stock, an index, a currency pair or a commodity
be. In contrast to trading with other financial products, CFDs do not incur any additional fees. Another difference is that you can go long or short
can. So you can benefit from falling prices as well as from rising ones. CFD trading is primarily aimed at speculative private investors. Here will
the possibility of a total loss was consciously accepted. In CFD trading, the buyer closes and the seller enters into a cash settlement agreement for the difference
between the purchase price and the selling price. The starting point for this is the course of the basic course. CFD trading can therefore be carried out with
any value, paper or index where a price formation occurs regularly. Of course, this also applies to commodities and currencies.
Advantages of CFDs
- Long or short positons
- OTC trading, longer opening hours
- leverage 1:30
- trading platform is provided free of charge by the broker
- low trading fees
- transparent pricing with no hidden costs
- CFDs can be traded through regulated entities
CFD trading using an example
CFDs can be assigned to assets such as: shares,
commodities or indices. The price of a CFD also develops in parallel with the price of the respective asset.
For example, if you bought a CFD on the Nasdaq at a price of 5000 points, the CFD would have an equivalent value of $5000. The value of the CFD now adapts exactly to the course of the Nasdaq.
However, you do not have to invest 5000 dollars, but in our example you deposit a security of 10%, i.e. 500 dollars. The rest of the sum (90%) is borrowed
then practically from the respective broker - against interest. Now only 10% of the actual value has been deposited, but you get the full profit if the price changes.
The leverage in this example is then 10. Leverage is very important. The leverage for CFDs is normally 1:30. The selected lever
also determines the margin (security deposit). If the Nasdaq were to rise a few points now, you would already have a profit.
Software / trading platform
No special software is required to trade CFDs. CFDs can be traded through the broker's trading platform. Many brokers offer the Metatrader 4 or Metatrader 5.
You can trade CFDs with both metatraders. A CFD order works the same as a forex trade. You can go long (buy) or short (sell) and also the limits stop/loss
and set Take/Profit. Some brokers even have a specially developed trading platform that is optimized for CFD trading.
This is the key of CFD trading: With enormous leverage, you can make a high profit with only a small change in price. However, if the price develops only slightly in the
opposite direction, a total loss must be taken into account. CFDs are basically highly speculative financial products that involve a high level of risk. Of course,
you can also use a CFD to hedge a position. This is called hedging. Disclaimer: Hedging is not allowed with CFD Broker Plus500.
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