CFD. What They Are?

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CFDs what are they and advantages they offer?

contract for difference

Contract For Difference, CFDs can be defined as agreements where the difference in value of an asset is exchanged between the time of opening and closing the contract.

The main advantage offered by this type of product to the trader is to have a certain asset (either an index, stock or commodity) without the need to physically acquire the underlying itself (in this case the share, commodity or index). In recent years CFDs boom has been globally meteoric, and is something that has all its logic, as it is a simple and very practical way to trade a multitude of different products in the financial markets.

This is a simple and especially cheap alternative, which allows us to trade the price change of the asset in question. For a better understanding, the easiest way is to do it through an example.

I will use one of the best and most important broker out there:

One Tradeview CFDs trade would work as follows: Instead of acquiring 500 shares of Telefónica, for example, the trader would buy 500 CFDs. If the share in question, in this case Telefónica, raises €5, the client would win €2500, while if the value drops €5 lose the same amount, that is, €2500.

Once we have known in general what CFDs are, it is essential to analyze each and every one of the advantages that Tradeview  offers us in its CFDs trades.

On the one hand, it offers us the possibility to trade in a multitude of different assets, from the world’s top stock indexes (IBEX 35, Eurostoxx 50, Dow Jones, & 500, etc.) to the most important commodities (oil, gold, natural gas …) through currencies, bonds, ETFs or stocks.

In addition, Tradeview  allows us to trade various CFDs without commissions and positions that opens and closes on the same day have no cost.

Also, the required margin is very low, between 1 and 2%, which translates into high leverage ( 100:1 the most common and up to 500:1 in currencies) which allows us to use a capital higher than could be used if the actual asset in question is purchased.

With regard to liquidity, an extremely important aspect when entering and exiting the market, CFDs offered by Tradeview gives very competitive spreads with real-time quotes without delay.

On the same way we will be able to trade from small lots to lots much bigger, something that would be nonviable if we trade on the asset in question directly, because we would need a very high amount of money.

CFDs can not only be used to perform trading operations on the assets listed, but are often essential tools when covering an investor’s portfolio of shares.

That is, if the client has a portfolio of different shares in the spot and he thinks the market is going to fall, it can be “short” in these actions and gain capital gains from that fall, which allows to compensate for the falls of shares in cash with the gains obtained from the sale of CFDs.

And last but not least, by trading in CFDs we can benefit from the direction of the market, whatever this. That is, if we consider that the market will rise we can position ourselves “long”, whereas if we think that an index, action or commodity will fall, we can go “short” and obtain capital gains from that fall.

Due to the specific terminology used in this product, Tradeview  has on its website a glossary with all the necessary definitions, as well as multiple examples of CFDs trades, something that can be useful both the trader who is just starting and the most experienced trader.

It is true that the CFDs trading on those assets mentioned above is not exempt from risks, as it may imply the loss of part of the invested capital. However, Tradeview offers several tools to manage this risk, such as stop loss orders, take profit, etc., which can automatically cut losses and avoid the losing of our capital to trade.

Therefore, although the product in question has more risks than others, the main risk assumed by the trader or investor is the ignorance of how the product works. If we know it well, we know our risk profile and how to trade with the product, CFDs trading is very useful for almost all investors, because it allows us to obtain important capital gains using a very small amount of money.

In short, we can say that the trading CFDs considering for example Tradeview, although not exempt from risks, offers multiple benefits to the investor or trader, so that proper and correct use of it can make our investment portfolio value significantly over time.

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