Why do traders choose CFDs for investing?

Understanding the Contract for Difference (CFD)

Have you ever stopped to think why so many investors around the world choose to trade through contracts for difference? The answer lies in the flexibility and reduced costs that this instrument offers. A CFD is essentially a financial derivative that allows traders to trade across multiple markets using margin and leverage, without needing to own the physical asset in question.

The main difference between a contract for difference and other investments is that you do not actually acquire the commodity or asset. Instead, you speculate on price movements and profit (or lose) as your prediction materializes. This makes CFDs very similar to margin trading in the forex market, but with a much wider range of markets available.

How does it work in practice?

The mechanism behind a CFD is simple: when you open a position, the trade occurs between buyer and seller, and the final result is that only the difference between the opening and closing prices changes hands. Imagine you want to speculate on crude oil or corn – CFDs allow exactly that, providing exposure to price movements of futures contracts without technically buying a futures contract.

Unlike traditional futures contracts, CFDs do not have fixed expiration dates or predetermined prices. They function like any other security, with spreads between the buy and sell prices. What you need to do is deposit an initial margin and start betting on market fluctuations – up or down, depending on your analysis.

The flexibility of derivatives

What truly boosted the popularity of CFDs worldwide is the combination of low operational costs with highly flexible leverage. Traders can trade an impressive variety of assets: cryptocurrencies, stock indices, gold, commodities, and much more. When trading CFDs, you are essentially buying and selling units of the underlying asset, betting on the rise or fall according to your market perspective.