Why trade CFDs?
CFDs are used to speculate on price movements on financial markets. They are available on well over a thousand different markets from a single account and it’s as easy to profit from falling markets as rising ones.
What are CFDs for?
CFDs, or Contracts for Differences, are financial derivatives. Traders use them to speculate on market movements without owning or selling, the underlying asset. With individual equities, instead of the physical shares, it’s the CFDs that are bought and sold, with an agreement between the buyer and seller to swap the difference in value when the contract is closed.
Trading on margin
Unlike traditional forms of trading, CFDs are a leveraged product. This means that only a percentage of the total underlying market exposure needs to be deposited in your account. This deposit is known as ‘margin’.
For example, Trade Nation’s margin requirement for the Wall Street Rolling Cash CFD is 5%. This means you only need $1,000 in your account to open a position worth $20,000.
This gearing means that CFDs offer the potential for significantly larger profits than standard unleveraged trading. However, it is important to recognise that there is also an offsetting risk of incurring large losses.
3 Reasons to Trade CFDs
1: Traders can guard against declines in their share portfolio by selling CFDs on the shares, rather than the shares themselves. In this way, they can protect themselves from falling prices without incurring the costs of closing out their physical shares.
2: CFD trading is leveraged. This means you only have to put down a small percentage of the underlying value of a position to control all of it. Also, CFDs give you the ability to trade in small stake sizes to suit your appetite for risk.
3: Trade multiple asset classes, such as shares, stock indices, FX and commodities, from one account.
At Trade Nation, a CFD account is available on our MT4 platform. It gives you access to a huge range of markets so you can centralise your speculative and hedging activity. Bear in mind that unlike our spread trading account, CFDs have variable rather than fixed spreads. But you still have all the advantages of running your account from a single platform, such as monitoring market movements in real-time, and trading without having to instruct a broker to act on your behalf.
Read next: CFD trading explained