CFDs (Contracts for Difference) are now a highly popular investment option for investors. They are available for forex pairs, such as the EURUSD, GBPUSD and many others, plus commodities such as gold and silver, stocks, such as Apple and Google, indices such as the DAX and the FTSE, and many more. There are thousands of financial assets available for trading as CFDs. CFDs allow retail and institutional investors to speculate on the price movements of the underlying assets without having to purchase or own them. As derivative products, they can be traded on leverage, which means only a small amount of capital is needed to control a much larger position in the market.
CFDs are not traded on exchanges but are rather over the counter (OTC) products offered via a network of liquidity providers and market makers who ensure they are priced accordingly.
Basically, a CFD is a contract to exchange the difference between the opening and closing prices of the underlying asset being traded. Profits or losses depend on the difference as well as the position size.
It is important to note that CFDs are regulated and can be traded as leveraged products. When trading with leverage, you are therefore more exposed when trading CFDs than rather owning and holding the actual asset. You stand to gain larger profits if the market favours your speculation, but your potential losses will also be
much larger if the market goes against you.
Price volatility and leverage are the major attractions for CFD trading. Previously vague and not well known or understood, CFDs are now a conventional investment medium well-known to the average retail investor from any part of the world. A primary appeal is definitely the lucrative opportunities, but CFDs also have other practical advantages.
CFDs enable efficient medium-term speculation. Consider this, an investor wishing to speculate on the price of oil in the traditional commodity futures market will have to take into account the cost-effectiveness and tax issues, and apart from huge capital requirements, the trader will also hope for a big price change in order to make any reasonable returns. As for CFDs, there will be less such considerations and you can trade with a much lower capital outlay, where even a slight price change can yield considerable returns. The ease of access to global financial markets and literally eased day trading restrictions, make CFD trading a great option for modern retail investors and traders.