What Is Contract For Difference Trading And Why Is It Becoming So Popular With Online Traders?

Posted: 16th February 2018 16:22

There are all different types of online trading that people do – either in their spare time as a hobby or to try and make a secondary income; or on a more serious level. You are probably already aware that trading stocks and shares is one method people use and have possibly also heard of forex – where people trade currencies against each other to try and profit from exchange rate fluctuations. As well as these, there is another popular form of online and mobile trading which many people engage in, but it tends to be less well-known by people from outside of the trading community.

This is a contract for difference or CFD trading. In this post, we are going to take a look at what it is and why a lot of online traders choose it.

What Are CFDs?

CFDs are effectively predictions of how a market will move within a set timeframe. You invest in a contract that says, for example, the Euro will close today up by a certain amount, or that in the next two days gold will drop below a certain threshold. If you are correct, you make a profit.

This is different from trading in stocks or currencies directly because you are not actually buying the assets themselves and then looking for the right spot to sell them, based on what you think the markets will do. Instead, you are using your analysis and knowledge to predict market movements.

CFDs Offer Flexibility to Part-Time Traders

CFD trading can be done across a huge range of markets, including currencies, cryptocurrencies, commodities, and share indices, and with a trading account on a reputable website, you can generally trade on as many markets as you like.  This means that traders who opt for CFDs rather than focusing on forex or stocks alone can dabble in whatever they see presents an opportunity without having to manage different accounts and platforms. It also means that CFD trading is almost a 24/7 thing to do, rather than being restricted to stock exchange sessions in one country. Both of these factors have helped in its popularity.

CFDs Can Be Profitable with Small Investments

Another reason for the popularity of CFDs with the online trading crowd is that it can yield decent profits with small amounts of capital because you are earning a percentage when you are right rather than simply gaining a few cents as you would, for instance, with a small amount of capital put into forex. It doesn’t take dramatic market events for profit yields to be worth your time.

CFD trading can be an interesting hobby and can be a good first step into online trading and investing, though the one thing to remember is that a CFD that is wrong is money lost – you aren’t simply left with something worth slightly less, as you would be if you bought stock that moved the wrong way - so if you do try it, never trade more than you are comfortable with potentially losing.