|Broker||Info||Best In||Customer Satisfaction Score|
|#1||Your capital is at risk Founded: 2006||Globally regulated broker||
BEST CUSTOMER SUPPORT Visit broker
|#2||Your capital is at risk Founded: 2014||Global Forex Broker||
BEST SPREADS Visit broker
|#3||66% of retail CFD accounts lose money Founded: 2014||Global Forex & CFD Broker||
Best Trading Conditions Visit broker
|#4||67% of CFD traders lose Founded: 2007||Global CFD & FX Broker||
ALL-INCLUSIVE TRADING PLATFORM Visit broker
|#5||72 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. Founded: 2008||Global CFD Broker||
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What are CFDs – and how do they work?
Contracts for difference (CFDs) have quickly become a key item in the global trading ecosystem. But what exactly are these interesting trading devices – and how can they best be used by traders? This article will explain in more depth and allow you to make a decision about whether or not they are right for you.
What is CFD trading?
A contract for difference is, in essence, a derivative product – which means that while its value rises and falls proportionately to the wider market on which it is based, it doesn’t actually confer any ownership in that market. Take the example of a foreign exchange pair: if you buy a CFD of, say, the USD/GBP pair, no actual foreign currency changes hands. Instead, you simply purchase the right to gain something if the price moves in your chosen direction. What you are buying is, in fact, a contract which lets you gain cash if one movement happens or lose it if the opposite happens.
Trading with CFDs isn’t quite like trading other instruments – but that isn’t just because of its derivative nature. CFD trading occurs “on the margins”, or through the use of leverage. Leverage allows you to place a much larger amount of cash down than you would otherwise be able to, and this is done by borrowing the difference in initial capital from the broker. It means that your gains can be amplified if the trade goes your way, although it also means your losses can be higher if you lose.
Why trade with CFDs?
One of the main advantages of trading with CFDs is that the gains you make are amplified, as outlined above. Another reason to think about trading with CFDs is that the barriers to entering the market are low. While some financial instruments require traders to go through complicated procedures in order to buy a single share, the best CFD brokers will be able to onboard new customers quickly and let them get started as soon as possible. After all: because these instruments are derivatives rather than actual assets, they’re not as scarce.
How do I trade CFDs?
CFDs tend to be traded through the web, and that means heading online to find the best CFD brokers is a smart move. Be careful not to fall victim to any scams though. Ensure that you check out your broker before you commit to buying financial products from them, perhaps by checking their registration with the relevant local regulator. It’s also worth looking at fees too. If your CFD broker is attempting to charge you extortionate fees per transaction, it’s well worth shopping around.
How do contracts for difference work?
In order to answer this question, it’s essential to think about the leveraged nature of the investment. CFDs are one of the most famous modern examples of leveraged trading, although the principle behind many investments is similar. Purchasing a property with a mortgage, for example, also relies on a strategic use of debt. However, the difference here is that CFDs are a bit more volatile than the property market, and their short-term nature means that you can’t rely on time to iron out market fluctuations as you may be able to do with other markets.
From a technical perspective, contracts for difference only really work well when traded online. That’s why top CFD brokers tend to be internet-based in nature. CFDs work particularly well as part of a day trading strategy, given the ease with which they can be bought and sold – so trading online and CFD trading often go hand in hand.
The bottom line
CFD trading is certainly not for everyone – especially given their leveraged nature. However, for those who have a medium to high-risk tolerance and want to avoid the bureaucracy and slowness associated with some other forms of trading, these instruments may be ideal.
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