CFD markets to consider

There are several areas to invest in with the use of CFDs (Contract for difference). The main ones we want to discuss in this article are stocks and Forex markets. They are both very popular, and a wide range of information is available to learn regarding both of them. So, we hope to shortly expose you to the advantages and disadvantages of both of these markets within the context of CFDs against using them on their own.

A short overview of CFDs

CFDs are a type of derivative. This means that they are contracts that allow a trader to benefit from the price change of an asset without actually owning it. Therefore, they do not have to pay the actual price of an asset or figure out how to exchange it. CFDs are unique in that they allow the trader to commit a trade at any time they please, the contract has no expiration date.

Stock CFD market

So, stocks are some of the most important types of assets a trader can deal with. CFDs can easily accommodate a stock for their purposes.

Advantages

Why should you invest in the stock CFD market as opposed to buying the stock itself? First of all, stocks tend to value very highly. If you want to invest in a stock with any sort of promise, you will have to pay very dearly to do so. Fortunately, CFDs, being a type of derivative, do not require any ownership of the actual stock. You can simply decide what the buying and selling point of your contract is, without having to trade the asset it relies on. The fact that you need not exchange the asset is an additional bonus. You will never need to actively convince another trader to exchange an asset when you feel the time is ripe. With a CFD, however, you can trade whenever you feel confident that the price you desired is reached.

You are most likely to deal in CFDs with a broker, while with stock trades, you are likely to carry them out yourself. The brokers can streamline the process for traders. They also have access to wider areas of the market you would not be usually aware of how to access. This, combined with the fact that regulations on CFDs are rather low, means that you will have access to a wider range of options when trading in CFDs.

Additionally, you can use trade on margin or leverage with CFDs. This means you can essentially take a loan out with the broker you deal with. They will contribute a certain percentage (generally up to 20%) to the overall investment. This can be of great help to a trader as it further decreases the funds they will need to contribute to a trade.

Finally, you will not have to set up a new account for every new trade. Trading in CFDs is a lot less of a hassle, as you can set up one account with each broker who will then give you access to all the different options. Most stocks will have different platforms, and for each of which you will need to set up new accounts.

Disadvantages

There are some disadvantages to this CFD market that we must mention, however. The main point of contention is the lack of special privileges you will have. Companies tend to give their investors certain privileges as an incentive for investing in them.

This includes information about the company and its performance. The company usually offers information about how it is doing financially. This can help you decide if you want to keep investing in them as time goes on.

You will be able to vote in shareholder meetings. You can help direct some of the vital decisions a company makes, as well as who will be the CEO by voting. The benefits of this are obvious for any trader.

Companies can off your dividends. As you cannot give the stocks back for a refund, only swap them, companies can offer you a chance to get some profits back. They do this by giving you what are called dividends when the company makes profits. So, if you still hold on to your stock, you can still make profits.

Finally, you are guaranteed payment if the company goes bankrupt. A court will prioritise paying you back if they can use the assets of the company if said company goes under. This is something that is required by law.

Forex CFD market

The Forex market is incredibly easy to access, and trading in them through CFDs is, of course, quite viable. All you have to do get into the market is, of course, exchange your currency. The price you exchange can be whatever you want it to be. Checking the prices for both is also similarly done and quite accessible. Most trades are done online without an exchange, through brokers. Brokers for both CFDs and Forex also require a spread as their payment.

Advantages

So, why should you trade in Forex with CFDs if the two markets are so similar?

Firstly, as we said before, you do not need to actually own the asset to trade in it. If you decide the time is ripe to trade in a particular currency, you do not have to convince anyone to exchange. That is, of course, if you are not trading through a bank (whose prices will be higher). With a CFD, you can just guess what the price difference will be and guarantee a trade when you so desire.

Secondly, CFD markets can make things simpler for you. You base your contract on only one currency and do not have to worry about the value change of another. This makes things far easier to keep track of.

Disadvantages

If anything, accessing the Forex market is far easier than investing in a CFD. It being a currency, you can trade at any price you please.

You should also consider that the margin is a lot larger for CFDs. This means that if things do not go your way, there is far more at stake. You will have to pay much higher premiums and thus it is possible to lose a lot more money.