Physical securities, CFDs, ETF or funds? Do you have problems understanding the terms? The term of CFD trading is quite well-known among traders and you will learn more about it in this article.
What does CFD stand for?
CFD stands for Contract for difference. It’s a contract between two subjects, often referred to as the buyer and the seller, while the buyer undertakes to pay the difference in the value of the contract at all times. In case the contract value is lower than purchase price, the buyer pays to the seller. In case the contract value is higher than purchase price, the seller pays to the buyer. This kind of trading has become very popular in recent years among retail investors, who are enabled to trade regardless of their ownership of securities. Financial instruments such as stocks, commodity futures contract and exchange traded funds (ETF) are examples of traded commodities.
Trading for both increase and drop is an advantage
CFD (Contract for Difference) on indices allows the investor not only to buy, but also to speculate on price drop of the underlying asset.
LONG POSITION – you open long position when expecting the asset price to grow. By using long position, you open trading and speculate on price growth of the financial instument.
SHORT POSITION - you open short position when expecting the asset price to drop. By using short position, you open trading and speculate on price drop of the financial instument.
A leverage effect is often used when trading with CFD.
CFD trading disadvantages
All forms of investment bring certain risks. It all depends on you - whether you’re able to accept those risks. Before opening any business account, one must carefully choose a broker, set their investment goals, test their knowledge and experiences. Most importantly, one must realize that in case of wrong investment, you can lose all investment capital. You should never invest money designated as financial reserves for times of uncertainty, you should always use only the capital indicated for investment. In this case, any possible loss will not be devastating for you.
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