Introduction to CFDs

Among the trading options proposed by Forex brokers, we find a particular instrument called the CFD. But what is exactly is a CFD and how should it be used to trade on the Forex and reap the benefits on all the proposed assets?

This is what we propose to find out here with some useful information.

What is a CFD?

The term CFD means ‘Contract for Difference’. To summarize, a CFD represents a derived product that offers the possibility of speculating on the rise or fall of a given asset without having to actually purchase that asset. It is therefore solely on the margin that you speculate.

The advantage of CFDs is that due to this fact, no major investment is required to accomplish added value. Basically you only risk losing the registered low difference in the case of error of judgement, and part of the registered rise if your intuition proves correct.

How do we know what we have gained with a CFD?

When a value that you have subscribed to using a CFD rises, your profit depends on the length of your position. When you make a good prognostic, the broker will pay you from the difference registered by the rate of the asset and when you lose, you have to pay the broker the difference equivalent to the points lost.

As with binary options, CFDs have a beginning that corresponds to the date and time of the contract subscription, and an end that is called the ‘date ex-coupon’. It is at this end date that you are paid or reclaimed the win or loss registered. However, in certain cases, this amount may pass through several transformations before arriving in your account. Contrary to other trading methods, you will have to be patient.

Different to other trading methods, the money you win with CFDs comes directly from your broker, the same with if you lose as the money you have lost is directly debited. It is in fact the brokerage that undertakes the purchase and sale of the real positions on the asset concerned. These sums being the dividends, this avoids having to pay specific taxes. Unfortunately, this also means that you do not have the right to a tax credit on the dividends.

What are the advantages of CFDs?

The advantages of CFDs are numerous and enable beginners as well as more experienced traders to access larger sums of money than through a traditional trading intermediary. Among the greatest advantages of these types of contract we find:

The possibility to trade a larger range of assets. Here it involves not just currencies but offers direct access to other financial and stock markets. You could, for example, decide to speculate on certain shares or indices.

CFDs also enable speculation on the rise of rates as well as the fall in rates. At the time of the contract subscription, you should decide the direction of the trend you foresee concerning the index or asset chosen, whatever it is.

Although CFDs require you to pass by an intermediary, here the broker, that plays the role of investor in your place, the costs involved in this type of contract remain quite low and do not present an obstacle to the capital you could possibly win.

Please note:  As CFDs enable you to trade a large number of assets from different markets you should know that the opening times of the other markets are not the same as those of the Forex. To find out these times you should research the market of the asset you wish to trade.

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