- Posted in: Trading Discussion Group
what do you know about cfds’?
cfds’ refer to contract for difference
this instrument is mainly applied by speculators who are looking for quick profits from price deferences and not really looking for real investment.
cfds’ were only traded when two traders wish to invest in the same instument, but in different directions, one will buy and the other will sell, which means there must be two traders with opposite views.but nowadays, brokers represent the counter party for the traders in most cases. which means there’s no need to have two traders to finish the deal.
cfds’ saves a lot for traders, since you have to spend so little to get the same benefit you’ll get from buying the real stock or instrument but in physical prices.
all what you have to do is sell/buy the cfd instead of selling/buying the real stock, by this you’ll save a large amount of money and benefit from the same price as if you’re buying/selling the real stock. if we have a stock valued at 100 usd in the market and we want to buy 100 shares, we have to pay 10k, when the price moves in our favour by 10% then our profit is 1000 usd which is a 10% ROI.
but if we want to buy the same share as a cfd contract we might only pay 1000 usd which is 10% of its market value, and if the price moves 10% in our favour our profit will be 1000 usd but it will be a 100% ROI. you can notice that the price moved the same percent in both cases but what makes the difference is the amount invested in each case, in real stock trading you’re required to invest a large amount of money to earn 10% profit while in cfds you only invest 10% of the amount in real trading but enjoyed the same amount of profit, with huge ROI difference
what makes cfds trading so profitable is you’re trading with leverage, all brokers providing cfds contracts provide leverraged trading for their clients, when you only pay 10% of the price of the instrument, the broker covers the difference in price and that’s a very well-known fact and that what makes cfds trading very attractive but also makes it very risky.
when trading cfds you must acknowledge many facts:
trading cfds includes very high risk which might cause a complete loss not only the amount invested but it might be the whole equity.
in most cases, the counter party of your trade is the broker itself, so choosing the broker is a very essential issue.
no strict regulations are available for cfds trading which is why the amount paid for a certain contract may vary from one broker to another.
cfds trading is not suitable for all traders, traders who are looking for consistent and moderate profit ratios with reasonable risk factors are not advised to trade cfds
cfds contracts is available for indices, goods, metals, energies and forex instuments.
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