CFDs: A better way to trade?
CFDs or Contract For Differences is a widely accepted trading format amongst many traders. When investors place a trade on a CFD instrument, they enter a contract with their broker that allows them to sell it later. This form of trading benefits the trader as they can trade the markets both ways, i.e., long and short.
The trader does not own the CFD asset but gets the profit or loss based on price movement. For example, an investor who places a short on Microsoft CFDs at 111 with 1000 shares will not own the shares. If the stock moves downward, they will gain some cash and vice versa.
CFD Trading: Some Important Features
Nigerian traders should know some important features of CFD trading to help them get an advantage in the financial industry. Our article will list all the vital benefits and demerits of CFDs to make your trading better and profitable.
CFD trading supports tons of financial instruments, including stocks, futures, forex, indices, metals, etc. Your broker may include all of them within their list of assets. This can eliminate the need to open an account with multiple exchanges.
As mentioned before, using CFDs, traders can speculate the markets on both sides. They also have access to multiple orders, including stop, limit, GTC, etc.
Leverage is one of the hot topics amongst many. A good margin on the account can help open positions with big lot sizes. While this helps get good profits, it can also put severe risk on balance. Brokers can provide as much as 1:3000 leverage on one account.
To understand the risk of leverage, let us consider a trader who trades with small equity of $100. With 1:3000 leverage, they can open trades with three lots on some currency pairs. If the market goes against the investor, they can suffer a margin call within 3.3 pips.
Availability of different portfolio
Brokers are now able to provide various account types in addition to the previous standard portfolio. ECN, Micro, fixed spread, etc., are a few examples. Each of these has its benefits. ECNs are beneficial for scalpers, while micro help in keeping the risk low while enjoying live conditions. Fixed spread accounts are helpful for those looking to trade news or overnight.
Regulation in the financial markets ensures that no one is getting cheated by their exchange. Regulators impose heavy fines if the trader proves that the broker is not willing to quote the rates properly and is using stop hunting. A name of few suitable regulators are:
- National Futures Association NFA and Commodity Futures Trading Commission CFTC in The United States
- Financial Conduct Authority FCA and Prudential Regulation Authority PRA in The United Kingdom
- Australian Securities and Investment Commission ASIC in Australia
- Cyprus Securities and Exchange Commission CySEC in Cyprus
Some traders may complain about the unavailability of enough volume. Liquidity helps get in and out of trades quickly and low slippage. The concept of volume is linked with your broker and exchange. A good brokerage will connect itself to multiple liquidity providers and banks for providing the best fills.
With multiple account options, traders also have a wide choice in the minimum deposit required for trading. Some brokers can allow traders to start with as low as $1 on cent accounts. ECN portfolios may have a higher requirement as they offer better conditions.
With CFD trading offering many benefits, traders should not forget the importance of maintaining risk through proper money management. Over leveraging and use of emotions can be detrimental to your trading.