Financial markets provide a platform for buyers and sellers to maximize their wealth through investments by leveraging probable trends. Unlike pure risks, these are speculative risks resulting in loss or break even on rare occasions. One of the most rewarding investment vehicles is the contracts for difference (CFDs).
According to the Corporate Finance Institute, CFDs are contracts between buyers and sellers, where the buyers transact in financial instruments by speculating the opening and exit price movements, based on global and national political, economic, social, environmental, and legal environments, which dictate the forces that influence price movements in the market.
Some of the tradeable instruments in financial markets include
- Interest rates
- Commodities such as grains, fuels, metals, etc.
Unlike traditional markets where buyers and sellers exchange commodities, buyers and sellers do not exchange the commodities transacted in CFDs transactions. The key consideration is the price difference between the opening of the contract and the exit of the contract.
If the value of the financial instrument appreciates, the buyer recoups the initial stake as well as the difference. On the other hand, when the price depreciates, the investor loses by exiting the contract at a lower price per asset.
In some rare situations, the price value may remain unchanged, and the exit value will be the same as the par value, which is the opening price. Consequently, there will be no gain or loss per se, but the buyer will still be the marginal loser when the brokerage, cash deposit, and withdrawal fees are put into perspective.
Hence, CFDs are the best option for investing in popular commodities such as foreign currencies, cryptocurrencies, and minerals and leveraging economic trends to build wealth.
Optimal CFDs Strategies
Market indicators such as political turbulence in major economies and economic shocks such as Covid 19 may disrupt the major economies and result in disruptions that may affect the market. Although force majeure is largely unpredictable and based mainly on speculations, some indicators can point out a possible disruption. An expected OPEC summit is preceded by a falling oil process. In this circumstance, a trader may predict that the oil producers may limit the supply to push up prices to increase their profit margins.
Sources of these indicators may include the media, company circulars, and national reports of economic performance, such as the US Inflation rates periodically released by the US Federal Reserve.
Once buyers consider the probable factors that may influence the price movement, they can then enter a contract that leverages the prevailing and expected conditions.
Afterward, the buyer can either long sell or short sell. Short selling is ideal for a volatile market, and it entails exiting the contract ahead of an expected slump in the value of the instrument.
On the other hand, long selling is an ideal strategy for a stable market. The buyer strategizes to hold onto the asset for a defined period that the instrument is expected to appreciate. Precisely, a short sell offloads the instruments, while a long sell extends the contract period.
Where To Trade Cfds
CFD Forex brokers are increasingly common as developers of market platforms compete by offering diverse portfolio options for trading. Hence, before signing up on a market platform, you should consider the following factors.
- Availability of instruments
You should sign up on a platform that allows you to trade in instruments that you prefer. Most CFD forex brokers, however, offer multiple investment instruments to optimize the gains for investors.
- Trading Platforms
The type of platform that a CFD Forex Platform offers plays a vital role in ensuring that the charts and analytical tools facilitate trading. The most common platforms are the meta trader 4 and 5 and the CTrader.
- Contract Condition
Some CFD Forex Brokers charge a commission as well as a spread or either of the fees. When the fees are too high, it reduces the returns on investments (RoI). Additionally, contract terms and conditions differ for each instrument, and it is important to ensure that all the terms are favorable before opening a trading account.
Other factors include the trading time, the minimum deposit, trading lot specifications, and deposit and withdrawal fees.
- Low Cost
Costs incurred by a trader include the spread, holding costs, market data fees, and broker’s commission. A CFD Forex broker should offer features that are commensurate with the expenses that a trader incurs.