What are CFDs

What are CFDs

 

What is a CFD?

Contracts For Difference (CFDs) are popular Over The Counter (OTC) financial derivative products which enable you to trade on the price movement of financial assets like Currency pairs Indices Futures, Commodity Futures, Cryptocurrencies, Shares and Exchange Traded Funds.

With CFDs, you can trade freely on price fluctuations 24/7, without actually owning the underlying asset or acquiring any rights or obligations in relation to the underlying asset. The main benefit of trading CFDs is the flexibility to trade against the price movements without actually buying or selling the physical instrument. That means never having to take ownership of barrels of oil or blocks of Gold.

AvaTrade’s CFDs derive their price from the underlying asset, so for example, if the price of Facebook stock or Gold goes up, the CFD price which tracks it will go up too. You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen), and if you think it is likely to go down (weaken). Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell, minus your spread, which is the broker’s fee.

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CFD Methods

There are various trading strategies that are often used when trading CFDs, that even the most unskilled trader can understand.  These decisions involve a number of trading methods and the most popular are the Long vs. Short

  • Long Position
    A long position in trading CFDs is when a trader places a BUY trade. This means he expects the asset will rise or see an increase in its value over time. He will effectively BUY at a low price, and then SELL once the price rises.
  • Short Position
    The short position occurs when the trader feels there will be a decline in the assets value and a ‘sell’ is selected, however, there is an intention from the trader to buy the contract back at a later stage. So he would profit from selling the asset at a higher price and then buying it back once the price has fallen. This might seem more of a complicated idea to grasp, but it comes naturally with practice. It also means that unlike when buying stocks you can trade CFDs even when markets are falling. This is a huge benefit to CFDs.

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Why Trade CFDs with AvaTrade?

Take your pick from a huge selection of Commodities, Stocks and Indices with some really competitive conditions and dedicated support.

What are the Advantages of CFDs?

  • No Exchange fees – You do not own the underlying asset and do not acquire any rights or obligations in relation to the underlying asset. It is a contract between the client and AvaTrade, and you pay no commission.
  • Leverage trading – You need significantly less capital to open a trade in comparison to owning the underlying asset. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
  • Multi-vehicle Investment – The ability to trade a range of instruments from the same trading platform.
  • Trade on both rising and falling markets – Open either short or long positions according to the market conditions and your trading strategy.
  • Hedging potential – A buffer for your trades if the trade is not going in the intended direction, you can open the equivalent position in the opposite direction reduce the risks.

What are CFDs Infographic

CFDs Infographic

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Still not entirely sure? Take a look at the Avatrade Reviews by our clients!