Advantages and Disadvantages of CFD Trading

CFD Trading Defined

One way to distinguish forex business from the other is to keep track of the changes in the technology. This field changes day by day, since there are a lot of things to be developed. Another thing you can do is to offer financial products which can be traded on the same account, other than what you already offer. The product we’re talking about is the CFD or the contracts for difference. CFDs are tradable on other products not limited to foreign exchange currency pairs. These products are sole stock companies. CFDs are financial products what are based on the price difference of the entry and exit points. If the difference is positive the moment that the trade is closed, then a profit is made. If otherwise, then trading has losses. The principle here is similar as when you are trading currency pairs, only the underlying products are different.

Advantages of CFD Trading

There are a lot of benefits and incentives in trading in the CFD market. The most vital of these advantages is that the CFD market offers unlimited access to new opportunities, compared to the forex market. In addition to the fact that it can be done using the same trading account. That is right! You don’t have to open another trading account since CFD products are already offered for trading in the same account that you already have. If you have opened an account with a broker that has an offering of MetaTrader platform, then you just have to proceed to the tab which displays all the currency pairs being offered, then just right-click on any pair. Next is to select the tab which says, “Show All”. The result list will show all the financial products offered by the broker, including the CFDs. Generally, CFDs are based on the stock price of the company. This will give access to the stock market – a market which can’t be traded using a regular forex account. In stock trading, you need to open a trading account which is especially designed for this. It is both costly and time consuming, in a sense that your resources are divided.

Disadvantages of CFD Trading

The major disadvantage of CFD trading is the margin required for a specific trade. This by far is much bigger than the locked margin for any trade in the forex. Many brokers enjoy this much lower margin in trading accounts, which means more business for them. For a simpler explanation, when you open a trade in a trading account, the margin on that trade is blocked. The more open trades or the bigger trades are there, the lower the free margin quantity. If the positions go against the trader, the margin available will be smaller and the trader will face two options to either add more funds, or to close the current positions. Thus, FCD trading is costly for a forex trader, but signifies a good business break for a broker. It is a win-win situation for a forex broker. To conclude, forex and CFD trading is the same, but the areas that move these two markets are different. Ability to combine the advantages of both markets is something that traders will do to become successful.



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