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What Is CFD Trading?

Aug 05, 2019

The world of today is one which is constantly being upgraded. Upgraded by new technology, upgraded by new thoughts and upgrade by new concepts. In this ever changing dynamics of the global market, CFD trading is a term that might be fairly new to some individuals. But although it may sound alien to you at first, but believe us, it is not so hard.

In this short article we will discuss what is CFD Trading and what it means for you. Let’s begin!


What is CFD Trading?

The acronym CFD stands for Contract for Defence Trading, which in the most simplest of terms can be explained as an understanding between a broker and a trader which allows them to reap profits from the price movement of assets without taking into consideration their underlying prices. Although the concept might sound a little complex at first, but it is a relatively simple security which was first introduced by European Traders and Stock Brokers.

The concept didn’t get a global publicity until the last few years when its advantages were reaped by both clients and brokers on a global scale. Today it is used across all major stock markets in the world and is a key factor in determining if a trade will be profitable or not.


How does a CFD trading actually work?

This type of trading process is achieved due to an understanding between the trader, broker and the client and was first introduced so that all parties involved in a transaction could profit from moving prices without taking into consideration underlying prices. In the past decade or so, trading using CFD methodologies have severely increased due to its wide popularity and acceptance all across the globe.


An example of it works

For example let’s take that a particular stock in the market is trading for a price of $25.26 and the trader buys 100 such shares. In a normal trading account, the client has to shell out $2,526 plus commission and fees. While in a CFD trading account, only 5% payment is required and thus the client will shell out only $126.30.

Now the stock increases in price and the final price before market closes is at $25.76. For those who traded through a normal trading account, will make a 3.95% profit or return on their investment; but those who traded through a CFD trader will make a 38% return on thier investment. Win win for everyone.


Conclusion

Since the inception of CFD trading in global markets, it has provided both clients and traders with a significant amount of advantages. Some of the most common of them being, having a higher leverage, having access to a global market from one dashboard, no need to shortening shares or borrow shares because of higher price, execution from professional fees because of low initial investment, and no need for day trading.

All in all, contract for difference trading has made a difference in the global market like no other and it is here to stay.

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