Using CFD gives you a lot of advantages in trading.
In this post I will answer questions regarding cfd (contract for difference) are. And what the advantages are of using contract for difference in your portfolio.
What is a CFD?
CFD stands for contract for difference. In a CFD the contract stipulates two parties, which is typically described as “ Buyer” and “Seller”, which the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. And if the difference is negative the buyer pays instead to the seller.
In effect CFDS are financial derivatives that allow traders to make a profit when the market prices are moving up or when the prices are moving down. If you want to know more about CFDS then read this article: CFDS for beginners
What are the advantages of using CFD?
When you start trading with CFDs you will encounter the term leverage. Leverages are one of the biggest advantages that a CFD has. What it does is that it gives you the ability to invest largely with a small amount of money. CFD gives you the ability to take advantage of small price movement. And many traders are using CFD for this purpose only.
However, investing through a large lever brings with it certain risks. This article is part of the short course of how to invest in CFDs. When you are investing in CFD you will always use leverage. A lever is always displayed as a ratio, eg 1:50. When the lever is 1:50, this means that with a balance of € 1,000 you can invest as much as € 50,000. With this CFD leverage you can add a greater amount of securities to your portfolio.
How does a CFD leverage works?
The leverage works in a similar ways as a mortgage. When you want to buy a house, you will need make a down payment and get a mortgage. In this case the mortgage gives you the ability to buy the house that you want. When you sold your house you pay off the mortgage. And what you have left is your profit.
The same way it works with CFD leverage. Let’s say you want to buy 100 Starbucks shares. With CFD Starbucks shares you only make a small down payment to acquire 100 Starbuck shares and the broker will finance the rest.
The broker is behind much of the position and the difference between the opening and closing price will eventually settle with your own balance. You are at no time the owner of the security; the broker will control both the buying and selling. When investing in CFDs, you have no further responsibility since you are not the owner of the physical effect.
Advantages of using high leverage
A major advantage of a high leverage is the fact that you can also achieve high gains with low power. If the share price rises eg with a euro and you use a leverage of 1:50 then you immediately earn € 50.00. However, when the price falls a euro, you will lose the same amount. The gain or loss on your position is usually settles with your balance. Be careful with leverage! You will not be the first to directly leverage from one hundred to open a position. With a higher leverage also come increased risks, since each euro to fall in price much higher loss entails. The leverage effect can work both ways and it is important to deal responsibly with this. Don’t use the full leverage in the early stage and go only use this useful tool once you know how you can make money investing. Once you figure out of how it works. Then using leverage will give you big profits!
Read more about CFD Trading: How to make money with CFD Trading