What is CFD Trading and What Are Its Benefits?

In today's modern economy, many people are asking, what is CFD trading? Financial derivatives are instruments that do not represent an actual claim on an asset or a company's cash flows, but rather, generally, derive their value from the traded price of an (ultimate) underlying actual claim or asset. The number of derivative contracts in the financial markets has exploded in the last few decades. Contracts for difference (CFD) are one such derivative that has gained enormous popularity since its recent inception and introduction. This article will answer the question: "What is CFD trading?".

Answering The 'What is CFD trading' Question?

In order to understand what is CFD trading, it's is crucial to understand what a CFD is. CFD is an agreement between two parties to pay the difference between the opening price and the closing price over the life of the contract. Usually the agreement is made between the trading platform and an institutional or retail client. The transaction cost to the trader for this operation is merely the bid-ask spread (and an incidental fee for holding positions open for additional 24-hour periods). In many respects, this arrangement is analogous to a traditional futures contract, but CFDs offer key advantages as an instrument for short term trading:

As stated, trading online CFDs entails no brokerage or exchange commissions. Given that the transaction/trade occurs entirely within a proprietary environment, the bid-ask spread may be slightly higher than that stated in liquid futures exchanges, but only slightly and execution at displayed prices no less competitive. For example, in the most-actively traded Forex pair, EUR/USD, the spreads are typically only 5 pips (The smallest price change that a given exchange rate can make), or 1.1339 sale / 1.1344 buy. But even here, the greater likelihood that you would actually execute your CFD trade at the visible stated price should also be factored into the worthwhileness of a decision.

  • Transparency in execution. The price you see when you initiate a trade, while not guaranteed, is nevertheless displayed and known to you.
  • High leverage- As a purely abstract transaction between you and the proprietary platform, transactions are no subject to no additional constraints. This direct relationship allows for significantly greater margins and leverage, typically up to 400:1 for forex trades.
  • Regulatory oversight- Traders in each country are subject to their securities authorities in a direct manner. Most associated promulgated regulations are of recent vintage and not created for older instruments and then "interpreted"
  • Offering every financial instrument in one user interface- The ability for traders to buy/sell across the entire global set of exchanges in a 24/5 environment with one interface is unrivaled in comparison to other offerings.

Related to what is CFD trading, comes the question - what are the best CFD trading platforms? Because these instruments are considered swaps and not securities, they are not subject to securities regulations. Instead, leverage is available to magnify invested capital and traders have access to a proprietary closed platform, with liquidity and contract execution not subject to the restrictions of any individual exchange. Participants also enjoy a single interface for all instruments.

Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.