The Growing Popularity of CFD Trading

When they were first introduced to the trading world in the early 90s, Contract For Difference (CFDs) were a reserve for big companies. However, hedge-fund traders saw them as an opportunity to benefit from the rising and falling of the market and they grabbed it, paving the way for other private investors. Today, CFD trading has become so popular that many people have enrolled for courses to study it before becoming active traders with hope of gaining enough knowledge to enable them make a living out of it. The number of brokers and investors is consequently rising by the day as more people turn to this type of trading. Let’s look at CFD trading, and the reasons behind its growing popularity, below.

Owning the Trade

One of the main reasons for the rising popularity of CFD trading is ability of investors to own a certain index, stock or position of a commodity even if they haven’t paid anything for it. It simply gives you a chance to make profits even when you don’t own any shares. All you have to do is go into a contract for a CFD at a quoted sum and the difference between the price and the closing position price is your earnings.

High Leverage

CFD trading is done on margin. This means that you can borrow money from your broker for the period of the trade. Thus, you are allowed to invest less money with an opportunity of gaining high profits at the close of the trade. The promise of great rewards for much less effort than in other types of trading is one of the contributing factors in the fast increase of CFDs’ popularity.

Volatile Prices

To investors in most other types of business endeavours, volatile prices are a nightmare. It’s a blessing, however, when it comes to the world of CFD trading. Combined with leverage, it makes CFDs one of the most attractive ways of trading. The volatility of prices in the market is, in fact, one of the main reasons for the growing interest of many people on CFDs.

Diversified Trading Portfolio

When trading, diversification is a big advantage since you have the chance of increasing your profits while pushing down the overall risks at the same time. The low margin requirements allow CFD traders access to multiple investment markets thus enabling them to have a diversified portfolio of investment. To make it all better than ever before, there continue to be a notable expansion of products in which traders can invest. For instance, you can now place your investment in more than 10,000 separate stocks, a situation which was previously unheard of until recently.

Apart from individual commodities, a CFD trader can invest in market sectors. This means that you can earn profits from the performance of various different companies brought together by a particular sector. They include oil and gas prospecting, financial services, mining, healthcare and transport.

Ease of Trading

Apart from the low cost of operation, investing in CFDs is much easier than most other forms of trading. Unlike in traditional trading of stocks, there are no restrictions on short selling in CFDs—you can as easily sell short as you can buy long.

Your broker may not charge you a commission whether you are entering a trade or exiting. However, you will pay for the spread. While the amount you pay is usually fixed, it may be determined by the volatility of the asset in question.

Conclusion

You just have to consider the increasing numbers of new CFD trade brokers joining the market to realise that the trading instrument is fast moving from the previous unknown status to the more familiar zone. The ability to invest at a low price with high gains as well as the opportunity to diversify their investment portfolio is luring more and more investors into the fold. Remember, however, that CFD trading does carry a high risk factor, and it’s important to trade through an established trading platform (such as CMC Markets) to minimise your chances of loss. Risks of trading with CFDs include standing to lose substantially more than your deposit, due to be being a leveraged product, and risk of close out, which is when your account and positions are closed if you don’t have sufficient funds. With any form of trading you should always be sure to have an in depth understanding of the risks involved, and never bet more than you can afford to lose. If possible look for a demon account so that you’re able to practise before trading live.

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