How CFDs Work – Understanding the Use of CFDs

How does leverage work? Is it really effective in enhancing your portfolio? If you are still at the stage of being doubtful and need to understand things a bit deeper, here are some important facts about CFDs that you simply need to know.

The Leverage

Most of the time, you pay full whenever you buy equities, stocks, and shares. Then you get to own them. You just have to wait for the prices of these assets to rise so you can get the much-anticipated dividends. One day, when these assets get the right price, you sell them and gain more profit. But the problem can arise if you don’t have huge finances to support these huge investments.

However, in CFD, it is possible to do all of these without the need to pay much for the assets that you buy. Here is an example, you want to purchase ASX200 stocks and have to pay 5-10% of the entire share price. If the stock price of ASX200 is $50, and you want a $200 investment, you can get 100 CFD which is equal to 4 shares. But when the stock price increases, you can sell your CFD and also get the same profit as with the seller of the share. What’s the best thing here is that you get the profit of x100 and not just x4. That’s the power of leverage.

Forecasting Tools

Profit Despite the Condition of the Market

Going short is possible in CFD. If you are holding stocks long-term but want to go hedging whenever there are drops in the original value. You can then buy stocks in CFD and go short. This way, you bet against others who think that the value will rise.

Access To A Massive Liquid Global Markets

By the time you sign up for a CFD account, you get greeted with an array of global markets, and they aren’t just small businesses. They are huge and very profitable. Examples include Facebook, Google, Amazon, and Apple. They are truly market makers that are constantly making huge activities. Buying stocks from them gets you the best opportunity to either trade up or down.

Dividends are Still Available

Thinking that CFD is a derivative, you might have the conception that you won’t get the benefits as the shares have. Partly right though, but if you are trading stocks and you go stocks plus the market goes to your favor, then you might still get the dividends just like when you do traditional stocks trading.

CFD trading is tricky, risky and many traders tend to hesitate to trade using it. But if you get to understand the concept of CFD and how it works, you can get a glimpse of its benefits. The only thing that you have to be careful about when trading CFDs is leverage. Although it has its own fair share of advantages, it won’t be good for you to overleveraged especially if you are new to the market. Overleveraging will only bring more risks to your trading account.

Recommended For You

About the Author: Jacob Wyatt