Contracts for difference (CFDs) are one of the most popular derivatives in the financial world. That there are still many who do not understand how CFDs work, or even what they are used to.
Many people perceive them as very complex products only from traders or professional fund managers use. Others elected her to be the same thing as gambling in the financial markets. But are all these perceptions really true?
What is a CFD?
As the name suggests, a CFD is a contract between two parties to exchange the difference between the price of the asset from the opening position to the closing position.
Since the CFD to obtain its value from the underlying assets that follow, they are considered a type of derivatives.
Derivative – an instrument obtains its value from another asset to follow
CFDs are a type of leveraged product. Put an initial amount of capital your CFD provider allows you to take up greater market exposure.
CFDs on different asset classes,
One of the reasons why people are sometimes confused on what the difference is because CFDs can be used for different types of asset classes.
For example, the CFD provider IG offer customers the use of CFDs across a wide range of asset classes such as stocks, indices, forex and commodities. Means even while the concept of CFDs is also applicable on different assets (i.e., you pay the difference between the price in the open position and closing position), the underlying assets that determine the value and volatility CFDs are radically different.
Traders and investors can use CFDs on the exposure it is looking in the financial markets. They also need to have a good understanding of the underlying asset.
What traders use CFDs
Since CFDs are leveraged products that allow holders to take up a much larger market than the actual amount they have put, they are popular among traders.
In general, most short-term traders aren’t looking for a long-term contract in the market. It aims to make use of leverage to earn profit through short-term fluctuations in price using their own methods of trading such as technical analysis.
For example, a 1% increase in stock price would be a lot easier for the trader to capture compared with an increase of 10%. With no leverage, the trader who takes the $10,000 the employee will be able to earn 100 $ from the trade.
With use 10:1 leverage in CFDs , the same the trader will be able to take a position size of $100,000 and make $ 1000 by trade, giving him 10% back. On the other side, if the market goes against valid, the losses will also be magnified.
Risk management when you use CFDs trading
We can not ignore the risk management when investing, not to mention that when we are trading. All of the gains and losses are magnified when leverage is applied and therefore traders need to be very familiar with the product they are trading and the risk management process in place that they stick.
A good rule of thumb that many traders follow is to never risk more than 2% of capital on the trade. If a trader has $ 10,000, then he or she should not exceed a loss of $ 200 on any one single trade. The idea is that your profit run while cut your losses quickly.
Why long-term investors use CFDs to talk
Contrary to thinking the use of CFDs is not limited to short-term traders. Long-term investors can also benefit them when published in cases.
When you hold a stock over many years, there will be times where volatility is high, or when the economic recession is looming. Some sectors that have long-term positions may be uncertain futures in the short term.
At such times, long-term investors may consider the use of CFDs to hedge their portfolios against equity risk in the fall without having to liquidate their property.
For example, if you have $20,000 worth of DBS stock and its price increased by 10%, your stock will be worth only $ 18000. However, if you may check your position by shorting the stock through CFDs, the losses resulting from Stock Exchange increase in value of the CFD you bought.
Unlike options or futures contracts, CFDs have no expiration date. And then, when you are more confident the company in the future, you can close the CFD and the future harvest on that stock.
Understand the differences
If you are considering CFDs, it is important to remember that the main risk that you encounter will be shown in the basic logic of that CFD on the basis of whether stocks or indexes or commodities.
Personally believe that only people who already have prior experience in dealing with the underlying asset should consider the use of CFDs.
Apart from كونتراct the spread or commission to pay, there may also be financial charges on certain types of CFDs, such as those dealing in stock. Make sure you know the cost of the page so you can include it in your investment decisions.
The past, the credibility of the broker which you use is extremely important, because any contract in the end with them. As such, you should only choose established businesses who are on the drayThey are.