What is CFD trading?

Introduction

What is CFD trading? There is also a chance you have heard too much of the term CFD or have even participated in CFD trading consciously or unconsciously, but you still don't know what it means. The purpose of this article is to cover important content regarding CFD trading.

CFD trading history

In the early 1970s, CFD contracts were invented to provide margin trading for commodities and other financial instruments, and in the 1990s, they became widely used. The use of CFD contracts in trading is popular around the world at the moment.

CFD transactions differ from futures contracts or options because futures and options provide sellers and buyers with predetermined dates and prices for a specific commodity. In futures transaction contracts, the parties are required to settle on a predetermined date and at a predetermined price, the market traders, however, do not want to offer or receive the traded product, but simply want to profit from the price difference between when they sign the contract and when they deliver the goods. With CFD contracts, this problem was resolved by removing expiration dates and removing the predetermined settlement date. Sellers and buyers are not required to deliver or receive the traded goods during settlement.

Imagine you are a trader on the financial market and after reviewing the crude oil chart, you have concluded that the price of oil will rise in the near future. Whenever you enter into a contract with a physical or future delivery, you must receive the purchased oil according to the contract's delivery date and store it so you can profit from the sale at the right time. Your job isn't as an oil trader, but as an analyst and financial markets trader. You can benefit from price fluctuations instead of receiving oil or paying high storage fees by using CFD contracts.

How does CFD trading work?

The word CFD is an abbreviation of the term "Contract for Difference", which means that in CFD transactions, you can make a profit without owning a special asset with only trading in the price fluctuations of this active. A CFD transaction is a derivative transaction. CFD trading is a contract between seller and buyer; at the time of closing the deal, they settle the difference in value between the asset's value at opening and closing. In the CFD market, you do not have a specific asset, but when buying and selling that asset, you profit only from the price change. For example, your analysis indicates a fall in the value of Apple shares in the near future, in which case you open an Apple stock sale trade. In this case, if the market trend is according to your analysis and Apple's stock price falls, you will profit; so in CFD transactions, with a correct forecast, even if the market is down, you can make a profit.

The purpose of CFD contracts is not limited to making profits from trading. They can also be used to cover the risks your business might face in other markets, which we will discuss in a separate article. However, in this article, we are limited to discussing the following example.

Now suppose you are an oil trader and bought a large volume of crude oil to sell in the future and get profit, but now unexpectedly the price of oil is falling and there is no buyer for your stored oil. In this case, when you open a sales transaction in the form of a CFD contract on crude oil, you reduce the risk of loss in your physical transaction, because the profit value of your CFD contract will cover the loss of your physical oil transaction.

What assets can be traded as CFDs?

Trading CFDs is possible for almost anything, including shares of various companies, precious metals, digital currencies, oil and gas, and anything else you can think of. You just need to find a broker that offers you this financial product in the form of CFDs.

The main volume of transactions in the Forex market are CFD transactions. Why are CFD negotiations so popular nowadays in your opinion?

The benefits of CFD trading

The absence of an expiration date

Its popularity has been attributed to the lack of a due date for CFD trading. Because the parties in these transactions agree to only pay the difference between the opening and closing fees, there is no set price or date for the transaction, so the seller and buyer can keep the transaction open as long as they like.

The possibility of trading with low capital

In CFD trading, you can get more profit with less capital using leverage; In fact, leverage is the credit that the broker gives you so that you make transactions with a larger volume.

The possibility of trading in both market directions

It is also possible to profit in down markets by opening a sell transaction by participating in CFD negotiations.

24/7 access to the global market

In the forex market, CFD trading is done internationally without any location restrictions, and you can trade on different symbols at any time of the day or night.

Wide variety of trading options

The variety of trading symbols in CFD contracts is very high. In CFD trading, you can take advantage of the price fluctuations of various trading symbols; from company shares to precious metals and various indices.

Possible risks of CFD trading

Using leverage in CFD transactions, in addition to increasing your profit, can also cause loss of your capital. Therefore, before using leverage (trading leverage), gain sufficient knowledge about how CFDs and contracts work, margin and leverage, and even then you should still use cautious leverage and with setting a stop loss, minimize the possibility of loss on transactions.

Conclusion

You have learned that in CFD trading, you do not need to worry about the price of an asset increasing or decreasing, and you gain profits by predicting trends in CFD markets.

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