The Contract for Difference (CFD) is a form of derivative trading that allows you to speculate the highs and dips of the crypto market. The CFD is a contract between an investor and the investment bank eligible for the short-term only. Once the contract ends, both parties exchange the difference between opening and closing prices of the financial asset such as forex, commodities, and share prices. If you trade CFDs, then you can either earn a profit or incur a loss depending on the value of the asset.
What is CFD Trading?
Trading with CFDs means that traders are given a chance to speculate the short-term price movements of digital assets. A few benefits of this type of trading include the ability to trade on margin - if you are speculating that the price of a specific cryptocurrency will rise, you can go long and buy the tokens, but in the event you think that prices will fall, you can go short and sell the assets while the price is still relatively high. CFDs have their own set of unique advantages; especially in the UK, they are considered tax-efficient since you don't have to pay stamp duty.
With CFD trades, you can even hedge an existing physical portfolio of your liking. Once you sign up for a CFD trading account, you have the option of choosing to trade from home or on a mobile application that you can access when you are on the go. There are several different platforms to choose from, one being The News Spy - you can create your free crypto superstar trading account.
CFD Trading and How it Works
When it comes to CFD trading, you don't need to purchase or sell the underlying asset - such as the physical share, commodity, or currency pair. In its place, you buy or sell a specific number of units for a particular financial asset if you think the price will fluctuate. After every price point change that happens in your favor, you end up gaining multiples of the number of CFD units that have been bought and sold. On the flip side, if the prices move against your favor then you incur a loss.
Margin and Leveraged Products
CFDs are considered leveraged products, meaning that only a small deposit is required of a certain percentage of the total value of trade for you to be eligible to open a position in the crypto market. This is labeled as trading on margin. Trading on margin can be risky because you're magnifying your returns as well as your losses depending on the full value. There is a potential risk of losing all your capital.
Costs of CFD Trading
With any crypto trading platform, CFD trading comes with a few costs that the user has to bear, such as the spread costs, holding costs, market data feeds, and shares-based commissions.
The spread refers to the difference between the buying and selling price when trading CFDs. You enter the trade by paying the "buy" price and exit using the "sell" price. The lesser the difference, or smaller the spread, the price only needs to move a little bit in your favor in order for you to start earning profit. Once the trading day comes to a finish, if you have any positions in your account, they can be charged a holding cost. In order to view the data for CFDs, the user has to subscribe to the market data by paying a small fee.