Are you trying to get into the world of Forex trading? Well, you’re going to find a somewhat tricky road ahead of you. First, there’s the learning curve – but did you know that even experienced traders lose money? Before anyone gets too discouraged, however, there’s another way to trade currency: CFDs. If this acronym sounds familiar, it’s because it stands for Contracts For Difference. It is very similar to futures, only without the high volume and capital requirements. If you own a halal option account with any regulated broker in your country, then using CFDs is right up your alley.
What are CFDs exactly?
A contract between two parties – let’s call them Bob and Alice – states that Alice will pay Bob the difference between the current price and a future price if that gap is positive. In case of a negative gap, Bob pays the difference to Alice. We call this difference a spread. A long position on your CFDs means that you buy them with the idea that prices will rise. The spread would then lead to a profit for you as per our previous agreement. On the other hand, if you have shorted CFDs, prices will decrease by enough, so they meet at 0. You’ll lose money as opposed to making money in this case – but hopefully, you won’t be in this situation very often!
What benefits does trading CFDs offer?
The main advantage of using CFDs to trade financial markets is that it allows traders to make money from rising and falling markets. Essentially, it eliminates some of the risks associated with traditional investment options such as stocks because you can still make money even if the market doesn’t grow significantly higher or lower. In this way, investors can make lots of money without having to wait around for an entire year before seeing any substantial growth.
Another benefit is leverage. Since there are no high trading volumes, even small accounts of $100 can get into the game. There’s also a meagre initial investment cost. You can buy or sell CFDs at any time, so there are no project management costs to worry about. It is also worth mentioning that they are settled at 5 PM London Time daily, which allows for more positions to be held before closing shop.
Another benefit of using a CFD is that traders only need to put up the smallest amount possible to access high-risk investments. It also allows them to learn more about investing in different assets since they don’t have to invest their entire life savings into one share of something.
There are many other advantages associated with trading CFDs, but ultimately they boil down to a far safer alternative for trading than traditional assets such as stocks and bonds. As a result, there has been a surge in popularity from retail traders and institutions looking to take advantage of the financial markets for profit.
What sort of risks do I have if I invest in CFDs?
The most obvious counterpart means that your broker can go bust before he pays out on his end of the agreement. The only way around this is buying extended warranties or contract insurance on your transactions which can sometimes double up as dividends, depending on the broker. Keep in mind, however, that this is strictly optional and comes with a price.
Another risk is that of leverage. Using CFDs might increase your exposure if you’re not careful. Lastly, there’s also the issue of taxation. Since profits on CFDs are considered capital gains rather than income, it is taxed at a significantly higher rate than other forms of trading or investment. The good news is that there are several tax loopholes around this matter which you can find out about by going through your local tax code.
Final word
Trading in CFDs can be exhilarating and profitable, but we recommend you make use of a reputable online broker like Saxo bank to help you through the pitfalls of CFD trading. To find out more and start your demo account, navigate here.