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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Key reasons to invest in Contracts for Difference (CFDs)

Key reasons to invest in Contracts for Difference (CFDs)

April 21, 2020

CFDs are digital derivatives whose value depends on different assets. They have several important advantages over ordinary stocks. Here are the basics.

Reasons Why You Should Consider Investing in CFDs

Today, global financial markets are more easily reachable than ever. It is estimated that over 15 million people engage in trading through the Internet across the world. Digital platforms like Metatrader 4 give open access to the global currency exchange with immense daily volumes.

The largest stock markets are also a few clicks away. In addition to currencies and shares, one may expand their portfolio with advanced derivatives. Known as CFDs, they offer a convenient method of capitalizing on price dynamics. Here is why this investing tool is worth considering.

The Core Principle

Contracts for Difference allow individuals to speculate on prices for assorted underlying assets. Today it is possible to choose between CFDs on currencies, stocks, market indices, commodities and even cryptocurrencies like Bitcoin.

In the days of yore, a single stock trade would require multiple phone conversations between brokers and traders. Today, all procedures are condensed into a single platform compatible with Windows and Mac. The trading environment is packed with sophisticated tools. These facilitate market analysis and help traders make profitable decisions.

Here is an overview of CFD trading in Thailand accessible through Forex platforms. In any case, the trader obtains a paperless contract with the broker. Its subject is price movement for the underlying asset. This distinguishes these derivatives from any physical securities.

Example: CFDs on Commodities

These derivatives are linked with goods whose price is set by the market regardless of producers. Typical examples include crude oil, wheat, gold, and silver. An Internet-assisted trade of CFDs does not involve the movement of physical assets.

No barrels of crude oil or tons of wheat move anywhere. For a trader, profit is always based on price dynamics only. Hence, if you buy CFDs while the value is low, you may sell them later for a tidy profit.

In a rising market, a trader may purchase CFDs in order to capitalize on their subsequent rise. However, not only uptrends may be lucrative. If you expect the price of your derivative to collapse, you may short sell the volume. This will protect against potential loss and allow a trader to purchase more of the same asset. As markets tend to revert to their average, your newly purchased CFDs are likely to gain value in the future, thereby bringing hefty returns.

Other Possible Choices

Some CFDs are tied to prices for crypto-coins, others are linked with stocks or even entire indices. Whichever type you opt for, the basic logic is identical. A market index, such as FTSE 100, is a diversified instrument for investment and trading. Its value depends on a cluster of stocks. Therefore, it is not expected to reach zero.

Major indices reflect the performance of giant corporations, such as Facebook, Apple, and other tech giants. Demand for their products and services is only projected to grow in the future. The category is therefore seen as a preferable choice. Conservative players trade and invest in indices for blue-chip baskets.

Overview of Advantages

The primary benefit of a Contract for Difference is potential gains from price movement without ownership. While shareholders who buy from the physical exchange will hold physical securities, you may purchase a purely virtual derivative and benefit from the same stock dynamics.

Secondly, CFDs have no expiry date. This means you may hold onto them as long as you wish. The absence of time restrictions makes the instrument handy for investment purposes and portfolio diversification.

To hedge risks, one should use a diverse set of instruments. Prudent investors add CFDs to their selections, along with currencies, digital coins, stocks, and binary options. Diverse assets ensure your risks are spread across a range of instruments. This means the average decreases in comparison with reliance on a single asset, such as individual shares.

Finally, technological advances allow finance management on the go. Trading platforms and smartphone apps allow you to monitor trends and manage positions wherever you are. This means you will not miss a good trading opportunity.

Where to Begin

Usually, CFDs are used by individuals with prior experience on Forex trading platforms. Rookies are advised to begin with currency pairings as the least complicated tool. Later on, they transition to more sophisticated software. This enables expansion of portfolios with derivatives including Contracts for Difference.

CFDs may be bought and sold through an international broker.  The firm must be officially licenced and regulated by reputable bodies (such as CySEC). A trustworthy intermediary will provide the necessary software and learning opportunities. Once a novice masters trades in the demo mode, it is possible to open a live account and deposit funds.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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