CFD trading is an investment derivative instrument that enables traders to speculate on market movements in the derivatives market. It differs from other financial instruments in that it does not represent any physical commodity, such as stocks or bonds, nor is it issued by any company.
It can only be traded by traders who are registered members of an exchange member firm. However, CFDs are popular because they offer some significant advantages over other financial instruments. cfd trading South Africa is leveraged, which means that you gain an advantage when you trade on a margin. CFD trading leverage can reach up to 100%.
There are many advantages to CFD trading and the main advantage is the low margin requirements. CFD trading allows you to speculate on market movements without owning any actual commodities. You can trade on the margin; this is where you use your ‘money to invest.
The money you use is CFD units that represent your interest in the underlying asset – for instance, you may borrow 10 CFD units from a particular financial institution in the UK. Once you pay back the loan, you have ‘repayed’ your margin call in terms of net profit and you now own that asset.
Traders will need to take note that CFD trading is leveraged and that this serves to increase the potential profit of the trader. But this repair to say that CFDs are ineffective or that they can not play an important role in the financial markets. CFDs are just one form of trading in financial markets and other forms of trading can provide traders with similar opportunities and leverage, without the need to use cash. Other forms of trading include options, futures trading, and fixed deposit contracts, all of which offer comparable advantages to those of CFDs.
CFD trading can be seen as providing investors with the chance to invest in shares but without the risk of actually buying and holding the shares themselves. Many traders are attracted by the low risks associated with CFD trading and many CFD trading platforms can reduce this risk to the minimum level.
For instance, some CFD providers offer CFD trades using ‘futures contracts, which allow traders to buy and sell shares in the future and also allow them to offset risk by taking advantage of price fluctuations in specific products. CFD traders also find it easy to operate on margins, which means that they can make profits even when shares in the underlying portfolio fall in price, so long as they offset this loss by buying or selling CFDs at the margin.
As well as this flexibility, many traders enjoy the simplicity and the fact that they don’t have to deal with trading commodities themselves. Because CFD contracts can be traded online, they are ideal for those who wish to invest in stocks, indices, commodities, and indices through online platforms. When trading CFDs, you will usually need to have a margin account, which allows you to trade on an as-is basis, and which is not open to the public.
This ensures that your position is secure and that if your preferred platform for trading CFDs closes, you will not lose any money. With most CFD trading platforms being liquid, you can access your positions quickly, meaning that day traders and large financial institutions can buy and sell CFDs easily and at affordable prices, as long as they remain liquid.