Trading CFD is the term that experts at XTrade use to describe when people make a trade on the difference between the point where the trade is entered and exited (The Contract for Difference). The CFD is an instrument which reflects the movements of the asset being traded. It is what allows for a profit or loss to be realised when the asset moves in relation to the position that was undertaken. The underlying asset is not actually owned when someone is trading CFDs. All that happens is that a client makes an agreement with a broker.
The Popularity Of Trading CFD Rises
The idea of trading CFD has really taken off in the last few years – it has become one of the most popular forms of trading as people find that it is more convenient, and faster, than actually buying the asset itself – whether the asset is a share, a currency pair, or a commodity.
CFDs are popular in part because brokers like XTrade require much smaller margins for them than they do for traditional assets. A traditional broker may expect a 50% margin, which means that you need to put down a lot of money to get started with worthwhile trades. A CFD broker will allow people to trade for a margin of around one tenth that – which means a much, much smaller outlay.
Before you get too excited, though, note that when you enter into trading CFD, the position shows a loss that is equal to the size of the spread. Before you can even break even, the stock will need to appreciate by the size of the spread. That, essentially, is the commission that you are paying to the broker. So, at that point you are not making much of a profit.
Where things get appealing, though, is that if the stock continues to appreciate, then the gains will be bigger, in percentage terms, than they would be on the owned stock itself.
Benefits Of Trading At XTrade
CFDs offer the benefit of more flexibility, higher leverage, and, once that ‘commission’ is paid off actual gains (whereas there will be commissions and other fees to worry about with other trading methods). The lower margin requirements mean that traders at XTrade can enter the market more easily – however because the leverage is increased, this means that both gains and losses are amplified. You run the risk of making a massive loss if things go wrong with trading CFD – but the same could be said for heavily leveraged accounts with any other form of financial instrument.
Most CFD brokers, XTrade included, offer products all over the world, for all kinds of asset. This means that you can pick something that you are confident in trading, and likely enjoy better success than you would if you were limited to trading in more specific niches.
The CFD market does not usually have a short selling rule, so you can short the asset at any time, with no extra cost. This is something that is not common in other markets, and is a big benefit.