How to make money on CFDs
If ordinary stock trading is not suitable for you, you are probably wondering what CFDs are, why they are needed and how to make money on CFDs? We give examples, give definitions and talk about it in simple language – in the article you will find all the answers.
Beginners rarely manage to invest in CFDs, as these are quite complex transactions. But well-known brokers who feel the market well work with such operations. It doesn’t just happen. The peculiarity of such contracts is that without having real assets, you earn on price movements. Let’s tell you more!
What is a CFD contract?
So, CFD is a powerful financial management tool. It allows you to trade with asset prices rather than buying the assets themselves. This is a speculative trade. You receive both the benefits and the risks associated with securities prices. At the same time, you do not actually own these same securities. To simplify, an investor plays on prices in different financial markets with the help of CFDs. So, for example, he concludes a contract: during the period of its validity, the price may decrease, and then the seller receives the difference. If the price of the asset, on the contrary, has increased, then the buyer receives the profit.
There are several types of assets that can be traded: currencies such as dollars or euros, bonds or stocks. It is also possible to buy or sell commodities such as gold or oil CFDs. When opening a position, the investor indicates the amount of the transaction and, in his opinion, the likely direction of the price. It can both rise and fall.
For example, if you think that the price of some shares will rise, he will buy the asset. If it seems to him that it is necessary to expect a price reduction, he will sell it.
CFDs for diversification
If an investor has doubts and is worried that the price of the shares he has bought will fall, he can avoid big losses with the help of CFDs. By selling an asset in CFD, he will earn on a downtrend and compensate for losses.
For example, you can see that data indicators indicate that the value of some stocks in your portfolio may decrease. At the same time, in your opinion, the company occupies a good place in the market, so you do not want to completely get rid of shares. In this case, you sell the equivalent value of the shares in CFDs on the exchange, and the value of the real shares is offset by new income.
Advantages and disadvantages of CFDs
One of the main advantages is the presence of a high level of leverage, reaching up to 300%. Therefore, it allows you to significantly increase profits. However, it is worth considering that this also increases the risks: the greater the leverage, the more you can lose.
Other benefits include:
- Tax flexibility, that is, due to the fact that the owner of the asset constantly remains the same, does not change, investors manage to avoid paying standard taxes. However, in most cases, you will have to pay tax on the profits received.
- Ability to trade on the global market and trade continuously.
- You do not need a large starting capital: you can trade with at least $50 on deposit and use a large leverage.
- Flexibility and a large number of opportunities: you can trade in both rising and falling markets.
There are also disadvantages. First of all, this is the need to pay for the spread, that is, the difference between the best selling and buying prices. However, it is still lower than the commission when buying assets. In addition, due to the fact that the market appeared about 30 years ago, it is characterized by weak industry regulation, and the government here does not give anyone any guarantees.