What are CFDs?

Contracts for Difference (CFDs) are financial derivatives that allow investors to speculate on whether the price of a specific instrument will rise or fall, without taking ownership of the underlying asset. Contracts for Difference have grown in popularity in recent years, enabling retail traders to invest in various financial instruments including forex, shares, indices and commodities over the internet, with minimal initial investment, through the use of financial leverage.

The Benefits of CFD Trading

As Contracts for Difference are derivative instruments, profits earned are exempt from charges associated with traditional trading, such as stamp duty. CFD trading also allows investors to use higher levels of financial leverage when compared with traditional trading, meaning that a smaller initial investment is required to open a position on the market.

Another benefit is that, through online CFD brokers like LCG (LCG), investors have access to multiple asset classes from a single trading account. This enables traders to take positions on a range of financial instruments, without having to juggle multiple accounts and the fees associated with each. Traders can then easily diversify their portfolios from a single account by investing in currencies, gold, oil, company shares and more.

When trading CFDs, investors are also able to profit from both rising and falling markets. This is due to the ability to both buy (go long) and sell (go short) when trading contracts for difference, providing traders with additional ways to earn profit when compared with traditional methods of investment.

The Risks Involved with CFD Trading

Although CFD trading has numerous benefits, it also carries a certain amount of risk. Due to the nature of derivative instruments and the fact they are traded with higher levels of financial leverage, inexperienced investors could quickly lose all their invested capital.

Before beginning to trade CFDs, an investor should ensure they have a detailed understanding of how the derivative instruments work and the inherent risks involved. Formulating an appropriate risk strategy is important before entering the market, as is spending time trading on a Demo Account, which provides the opportunity to build an effective strategy in a risk-free environment.