If you are new to trading, you might be looking at CFDs and trading CFDs. Depending on the country or region where you live, you may or may not have access to CFD trading. CFDs are incredibly popular in some areas, but there are pros and cons to CFD trading that you should know about.
Read on to learn more about the essentials of CFD trading.
What Exactly Are CFDs?
Firstly, you should understand the cfd meaning and what exactly these are about. CFDs stand for contracts for differences. This aspect emphasizes the fact that a CFD is really a contract between you and the CFD provider or the broker. There are a few different CFD providers in various markets around the globe, such as IG Markets.
Depending on your chosen markets, you will have a contract with them to essentially exchange the difference in price of something that you are trading. For instance, in the financial markets, we usually trade stocks and commodities.
You can pretty much have a contract for difference on anything that you want.
How Does CFD Trading Work?
It is super easy to understand what CFDs are if you contrast them to what everyone knows, which is shares. So, taking the example of shares, if you want to buy some Netflix shares, you will purchase the shares and the shares will be deposited into your account, while your money will go to the seller. In this example, you will have a percentage share in Netflix.
Your shares will enable you to own a certain percentage of the assets. Your shares will have an intrinsic value because the company does, and you may even get voting rights. Essentially, you will be a shareholder in Netflix.
How are CFDs Different from Shares?
Furthering the example of Netflix, you should know that CFDs are different from shares. CFDs are essentially contracts or deals between you and the broker, where you will essentially bet on Netflix’s share price. This aspect indicates that you can buy CFDs, which means that you will be betting on the price of it to go up or down. You can take a short position or sell and bet on the price going down.
With CFD trading, you are not a shareholder, but you are simply betting on the price movements of the share, and your contract is with the broker.
Final Thoughts: Why Choose CFDs over Stocks?
Now you might be wondering why you should choose CFDs over stocks. The thing with CFDs is that these actually enable you to trade on stocks that maybe aren’t in your currency. For instance, if you are in the UK and you want to trade American shares, it is pretty difficult, and you will have to buy in dollars.
CFDs are comparatively simple, as you will get to trade in GBP, and you can open and close trades very quickly. So, there is definitely an advantage that comes with CFDs that you cannot leverage with other conventional trades.