The history of Contracts for Difference started in 1999. Previously, overseas stocks were not as available, and the traders were not able to trade on the falling market. This was the main disadvantage of the trading stocks. In order to trade on the falling market, traders had to borrow shares at interest first and only then they could sell them. And, in fact, the investor was to have the market risk and was obliged to refund stock and pay the interest.
CFDs give a chance to a trader to gain on both market directions. Both traders and investors are able to get profit round the clock on foreign currency from any location on Earth.
The concept of CFD trading
A CFD is actually an agreement on settling the difference in currency pair value or share between the time of the contract opening and the time of its closing. It is a contract for differences between buy/sell prices, which are based on the trading volume of the core instrument. Instead of buying/selling currencies or physical gold without delivery, you will be paid or charged by an amount depending on the volume of trading and the buying/selling prices.
You can easily trade on a wide range of CFD markets without the delivery of the main instrument, and gain potential profit if the market goes up or down. It means that a trader can trade on the price of gold without any Gold delivery, or on the stock price without a necessity of buying/selling the stock.
CFD trading share is almost the same as normal share, while you deal at the cash price of the share, and you pay a commission, which is actually a percentage of transaction value.
Contract for Difference trading is your chance to trade on margin, while a trader doesn’t have to pay for the full position value. He can simply put up a deposit or margin from at least 0.2% while using a trading account, which means that it’s possible to trade up to 500 times your initial capital.
Following the CFD Analysis
When closing the trader’s position, it’s possible to realize the difference between the opening contract value and the closing one. The principle is the same as when buying currency pairs or trading futures – the degree to which you are correct in your CFD trading influences directly how much you win or lose. One of the main CFD advantages is that you don’t make any physical purchase, so you can’t incur any stamp duty.
Thanks to such margin products, like CFD finance, a trader is able to use his investment capital very effectively.
Go long when buying and go short when selling
CFDs allow you to profit from falling or rising markets, as well as buy/sell at the quoted price. Other shorting shares methods, as well as other markets, are mostly inconvenient and pretty expensive.
Another advantage of CFD trading is the possibility to trade a really wide range of fin products, for example, currency pairs in FOREX, Metals, Shares, and futures.
Let’s say if you have an interest in shares, the exchange rate of USD against EUR, and the price of oil, so you can deal all of those markets with one and the same CFD provider on one and the same account.