Contract for difference (CFD) is a form of Forex trading in which the buying and selling of the value of an instrument on various markets is done without actually owning the underlying asset. CFD trading is basically a contractual agreement between the broker and the client. There are numerous advantages to CFD trading that has resulted in an increase in the popularity of the CFD trading.
Some of the advantages that have helped in increasing the popularity of CFD trading:
1. Higher leverage
CFD trades have a higher leverage than traditional trading. The CFDs standard leverage margin can start from as low as 2% and go as high as 20%,depending on the underlying asset in a CFD market.
The lower the margin, the less capital is required for the trader or investor and a likelihood of greater returns. This ultimately means that increased leverages can also have an increased likelihood of loss.
2. Global Market Access from One Platform
Traders have various products to trade on and CFD offers to all these various markets can be accessed on one platform.
3. There is no Shortening Rules or Borrowing Stock
With CFD trading there are no short selling rules. Therefore, any asset on the CFD trading market can at any time be shorted, as there is no actual ownership of the asset,either shorting cost or borrowing cost to the trader.
4. Professional Execution with no Fees
Like traditional brokers, CFD brokers provide the same order types like stops, contingent orders, and limitations like one will cancel the other out. Most traditional brokers charge fees for these services, whereas brokers of the CFD do not charge their clients any fees, if any at all.
CFD traders do not generally charge fees for a client starting or leaving a trade. They make their money through motivating the client to pay the spread.
But, there are negative shortfalls associated with CFD trading markets, like paying for spreads on the entrance and exit of trade decreasing the chances to make a significant profit.
Another disadvantage of CFD trading is that its regulation is not very high and the credibility of most of the CFD brokers is based off of reputation.