CFD is derivative trading that lets the trader deal with the value of the underlying asset and not the underlying asset itself. CFD trading has become popular because of these advantages;
- Benefit from going long or going short
- Leverage helps you go further with your trading capital
- You can opt to trade over a range of markets
- Hedging the portfolio
- Mirror trade the underlying asset
- The use of DMA
Understanding the leverage in CFD trading
CFD is great for retail traders because they do not have to spend a huge amount of money to be able to secure a trading position. You only have to make a small deposit on the full value of your underlying asset. This deposit is referred to as margin. The amount that you must deposit will depend on the size of your trading position as well as the margin factor based on the market you have chosen.
Furthermore, it is important to take note that the profit or loss that you will incur will be solely based on the exact size of your position and not merely on the deposit you made.
Going short and going long in CFD
Traders and brokers have an agreement in CFD. It is about the payment of the opening and closing of the trading position. Given these circumstances, trading in CFD is more flexible compared to any other trading form. What’s so exciting about CFD is the fact that you can benefit even with the falling market.
A wide option of financial markets
If you want to experiment with other markets other than Forex, then CFD is the best place for you since there are more than 17,000 markets available, including cryptocurrencies, options, commodities, shares, and indices. The good thing here is that you can access all these markets in one platform, you won’t have to transfer from one platform to another. Every market you need is available in a single login plus you can trade on the go, using your smartphones.
Similar to the underlying market
Originally, CFD was created to mimic the real trading environment of the underlying asset. For example, you want to buy a 2000 Apple share, you will have to pay for the entire 2000 Apple shares in traditional trading. In CFD trading , there will be adjustments on the dividend payments.
Hedging the Share Portfolio
Take this example, you have shares in HSBC and you are planning to hold into it for a long time. Furthermore, you are thinking that the banking sector will take a downturn, so you want to minimize incurring huge losses. You decided to open a short position.
If your decision is right and the HSBC indeed drops its value, then there’s a huge chance that your CFD position will gain some profits against your loss.
DMA
DMA stands for Direct Market Access. This is for advanced traders who wanted to interact with the order books from Forex providers and stock exchanges. DMA is proven to be a powerful tool used in trading.