CFDs – All the Benefits of Owning a Security, without Actual Ownership
These days, CFDs are all the rage as far as online trading is concerned. These Contracts for Differences offer traders (and brokers) several advantages, which make the setup a very attractive one indeed.
What exactly are CFDs though? A CFD is in essence a futures contract arrangement, between a broker (the CFD provider) and a trader (the client), the object of which is the difference between the current value of a traded asset (which can be just about anything, given the impressive market coverage of this financial derivative) and its value at the end of the contract.
CFDs are always settled in cash, regardless of whether losses or profits are realized. A physical delivery of any goods or securities never takes place. The CFD eliminates this part of the equation, and that is in fact one of its main draws.
Because of this cash-only settlement, it is said that CFDs provide most of the advantages and risks associated with asset-ownership, without the actual ownership.
The issue concerning ownership cannot be stressed enough in relation to CFDs. Time and time again, people open accounts with CFD brokers, thinking they’ll be able to purchase cryptocurrencies such as BTC, LTC, ETH etc. By purchasing a BTC CFD though, they won’t ever gain ownership of physically delivered Bitcoin: they will only be trading the difference in the asset-price.
What are the advantages of CFDs, beyond those already extolled above?
Leverage-wise, CFDs are much more attractive than most traditional trading products. As far as margin requirements go, they cover the 2%-20% range. Lower margin requirements are obviously better for traders.
In the CFD markets, minimum capital requirements are not a problem. Trading accounts can be opened for as little as $1,000 – or even less.
Market access and market coverage are other major advantages offered by CFD brokers. Most brokers cover all the major international markets and their selection of tradable assets is nothing short of amazing.
CFD trading does not come with any short-selling rules. Given the nature of the product, there are obviously no shorting costs or borrowing fees involved.
Also, most of the time, there are no fees charged for individual CFD-based trades. Obviously, the broker has to make money. It accomplishes that objective through the spread.
The CFD spreads are usually fixed. Depending on the asset-price and volatility, the spread can be small or very large.
A crypto asset like BTC will feature massive spreads (in USD), since its price is in the thousands of dollars and its volatility is extreme.
Are there any disadvantages to CFD trading?
CFD trading is not regulated and there are indeed scores of shady operators out there pushing this product. The reputation of such brokerages is not really based on their time spent in the industry or their financial status. Most of the time, word-of-mouth, or rather, forum/message board posts decide in this matter.
Because of the spread involved, traders won’t be able to profit off small asset-price movements through CFDs.
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