Contracts for Difference (CFD) is derivative trading allowing traders to speculate with the rise and fall of prices out of different financial instruments such as indices, shares, commodities, and currencies. CFD trading is also a leveraged product which goes to show that you’ll be trading on margin. Opening a position will only require you to pay a small deposit.

What’s very important to note in CFD is that you don’t own the underlying asset. You are merely buying and selling it out of the prediction you have in the price movement. CFD also has its own pros and cons. Knowing these things will benefit you in the long run.

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Pros of CFD Trading

You can go long and short

CFD allows you to go long and short as to the price of the product. Hedging is also used in Contracts for Difference because it is beneficial to their long term portfolio in case the market goes down.

You can start trading using a small capital

Since CFD is leveraged and you will be trading margin, traders are only required to pay a small deposit to start trading. Even so, traders can still earn a basic profit. For example, using a 10% margin, traders can make $10,000 out of the $1,000 that they deposited.

Different options for the investment product

Traders can access a wide range of investment products which includes stocks, indices, currencies, and cryptocurrencies.

Cons of CFD Trading

The risk of getting closed out with your position

Since margins and leverage are involved here, traders must keep an eye on margin calls since it might put them at risk of closing their position in case the losses overwhelm the account hold out level.

Holding cost and other fees

Contracts for difference are ideal for day traders. This is because, when holding a position overnight, CFD traders will have to shoulder holding fees. Though it is just a small amount, it can accumulate over time and this can affect your trading strategy.

No dividend payouts

In CFD, you are not holding the actual stock, meaning to say, you also won’t receive dividend payouts.

What Determines a Good CFD Trading Platform

There are a couple of ways to determine whether the trading platform is best for you. Here are some of the characteristics of a good trading platform.

Huge range of products

A good trading platform must offer a wide range of products that you can trade in the market. You may be focused on trading a single product now, but later, you can only consider other options.

Features good risk management

A good trading platform must have a feature particularly used in risk management. It can be a guaranteed stop-loss which is very helpful in minimizing the losses you incur in trading.

Provides education resources

Aside from being a trading platform, a good trading platform must also provide educational resources that can help in educating traders in the technical aspect and also about the news that could affect the financial market.