CFDs (contracts for difference) are known among traders as “derivatives” So let’s first explain what a derivative is.
When you buy stock you own a portion of the company that issues it. When you purchase cryptocurrency you own it, and when you pay with it you own less of it. If you use a quantity of one currency to buy a quantity of another you forfeit the amount you paid using the former and wind up owning the amount you gained in the latter. But when you buy a CFD you don’t actually own anything. Nonetheless, you can create trading opportunities. How can that happen?
Because while a CFD is a contract, it is not a contract to transfer possession. Instead, it is a contract whose results derive (hence the term) from contracts between other people. Those other people are the ones who actually do buy and sell a possession.
Short and Long Positions
In a CFD, you are contracting on whether the value of a pre-determined amount of pre-determined assets will appreciate or depreciate over a pre-determined period of time. Since no one can say for certain how many such contracts will be negotiated, signed and fully implemented by a certain future date, a CFD can turn out either way. Moreover, when it comes to that future date, CFD traders can either take what are known as “short positions” (say a day or two) or “long positions” (a week or more, even months).
An informed trader, however, is a successful trader, since he or she will have a relatively good idea how to interpret market data. Understanding how to interpret the data is the key to creating CFD trading advantages.
CFD Trading Methods
We all know that the value and, therefore, prices of stocks, currencies, commodities, and indices goes up and down. There are a variety of reasons why, the most obvious of which is simple supply and demand. If supply rises while demand decreases, value will decrease as well. If supply decreases while demand rises, value will increase. There are many factors that can affect supply and demand. These include:
- New sources of supply – like the opening of new gold or silver mines
- New technologies that speed up production or decrease consumer dependency – new pipelines and alternative fuels, for example
- Trade tariffs – which reduce trade between two countries and affect an asset’s value
- Changes in income and capital gains taxes – since they can encourage or discourage investment
- The cost of transporting raw and finished goods – the price of jet fuel and port fees can go up or down
- And even the weather – an unforeseen severe drought, for example, will undoubtedly reduce the corn or soybean supply and shoot up prices
The job of a good trader is to put all this together in order to accurately predict the future value of a financial instrument. If you think you can do that, then you’re ready to start buying and selling the CFDs we offer for stocks, currencies, commodities, even indices.