Contracts for Difference, commonly referred to as CFDs are without a doubt one of the most popular financial derivatives available to investors. As an investment option, derivatives have helped in reducing exposure to the mainstream traditional market, hedging, and providing access (for speculation) to markets that would otherwise have been unavailable to the average retail investor.
CFDs allow investors to speculate on an underlying asset, and benefit from their price fluctuations, without having to purchase the asset. CFDs are traded over the counter (OTC) via a network of liquidity providers and not on exchanges.
When an investor opens a CFD contract, the agreement is to exchange the ‘difference’ in value of the underlying financial asset between the beginning and the end of the contract. This essentially means that it is a speculative financial transaction between the trader and the broker i.e. if the investor is right, he earns a profit. A key benefit of CFDs is that they can be traded on leverage, which means a much larger position in the market can be controlled with a smaller amount of capital.
When trading CFDs, investors speculate on the prices of the underlying asset, they do not own the actual asset. The value of a CFD contract is dependent on the prevailing prices in the underlying market. The amount of profit or loss achieved depends on how much was invested in the underlying position as well as how far the price moved away from the contract open price. Obviously, the higher the stake amount, the larger the potential profit or loss; and the farther the price moves from the contract open price, the bigger the profits or losses.
Leverage is without doubt one the major attractions of CFD products. It effectively ensures that investors can earn magnified profits even when prices make marginal movements. The constant price fluctuations of financial assets ensure that there are practically unlimited opportunities for investors at any given time.
In essence, CFDs offer efficient short to medium-term speculation opportunities. For example, an investor wishing to speculate on crude oil in the traditional commodities futures market would have to take into consideration the cost-effectiveness, tax implications and the large capital requirements. Plus, in order to earn a reasonable return, the trader would require a substantial price change to take place. With CFDs, there is far less of these considerations and with the use of leverage, even slight price changes can yield considerable returns with the use of leverage. CFD trading offers excellent opportunities for modern retail investors and traders. At OceanTrade, investors can easily and conveniently trade CFDs available on Currency Pairs, Stocks, Indices and Commodities.
Be sure to visit the OceanTrade Education Center to learn how to trade CFDs, plus plenty of handy tips to boost profitability.