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What is Contract For Difference and How Leverage Benefits CFD Traders

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cfd traders
What is Contract For Difference and How Leverage Benefits CFD Traders
By admin April 7, 2022
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What is a CFD? It is a derivative product which stands for Contract for Difference. It is popular nowadays because in a single platform, you can trade different markets like commodity, stocks, bond, Forex and others. The buyer profits if the closing price is higher than the entry point. But if the price is higher at the opening than the closing then the broker gets to have the profit.

Unfortunately, due to some restrictions by the Commodity Futures Trading Commission and the Securities and Exchange Commission, CFDs are not available in United States. They are only available in Asia, United Kingdom and Europe.

Understanding the Long and Short Positions in CFD

There are two main parties in CFD trading – the long position or the buyer and the short position or the seller. The CFD broker can either act as the seller or the buyer. It is important to note that CFDs are very different from futures or options that are both widely available in the U.S. Futures and options do not have an expiration date, the contracts are also individually negotiated and there is no required standard contract size.

CFD Markets include

  • Cryptocurrencies
  • Currency
  • Sectors
  • Global financial indices
  • Commodities
  • Bonds
  • Stocks

CFD is a great tool that is best used for short-term price direction on hundreds of financial instruments. CFDs are also derivative instruments that allow the investor to deposit only 3.3% to 50% of the full value of the contract, depending on the broker.

Contract for Difference is being traded through the ask or bid price of a certain financial instrument that is being used. Bid price refers to the price that you sell. If you are residing in the United States, you won’t be able to use CFD because it is considered as highly leveraged derivatives. It was banned in the US because of the 2008 incident in which totally large bets has gone wrong and small time investors are the ones who are suffering so much from the damage.

Leverage in CFD

Leverage, as they say, is a double-edged sword. It can mirror advantages but it can also cause destruction in your trading account. Nonetheless, too much of anything is not good, even in CFD trading. This key feature of CFD can be used in different markets such as Indices, Cryptocurrencies, and Forex. It is, therefore, very important to know about what is a CFD before you use leverage on it.

Leverage Magnifies Profits

Just being able to put up a fraction of the full value of your asset is already very appealing. Thus, you still receive the same amount of profit as when you pay the full amount of the asset. Profits are calculated based on the full value of the position and not based on the partial deposit that you have made.

Leverage Gears More Opportunities

With the use of leverage, you can free up some of your capital that you can use to other forms of investments. Gearing is the ability to increase your capital for investment.

Leverage Allows Shorting the Market

Leverage products allow you to speculate on the movement of the market which allows you to benefit even for falling markets, the same as those that are rising. This move is called going short.