What are the CFD assets that you can trade? As there are many interesting opportunities are presented in the CFD market, here are the 6 types of CFD assets that you can get familiar with.
A contract for differences (CFD) is a financial derivative instrument that can be bought and sold in the financial market. CFDs are called derivatives because they are derived from the underlying instruments. They are like the mirror image of the real assets traded in different financial markets, and there is no delivery of physical goods or securities with CFDs.
CFDs are cash-settled but allowed to use margin trading so that investors need only put up a small amount of funds to trade CFDs in a bigger volume of transactions. CFDs essentially allow investors to trade short-term available for both Long and Short positions, and are especially popular in forex and commodities products.
Experienced traders may trade CFDs as a common thing. They can allocate funds into CFDs by using an advanced trading strategy. CFD traders may bet on the price moving up or downward. Traders who expect an upward movement in price will buy the CFD (Long), while those who see the opposite downward movement will sell the instrument (Short). The net difference between the buying price and the selling price are then netted together, which will represent the gain or loss from the trades.
The main types of CFD assets available for trading are:
A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. Units of stock are commonly known as "shares". The instrument is usually bought and sold on stock exchanges. Trading stocks as CFDs is based on the movements of the stock price of underlying shares. It means that if you trade stocks as CFDs, you don’t need to own the underlying shares. For trading stocks as CFDs, you just need to open an account with a broker providing stock CFDs as the instrument.
See also: Forex Brokers Offering Stock Trading
An indice or index typically measures the performance of a basket of securities. It captures the entire market such as Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500 (S&P 500), or more specialized market such as indexes that track a particular industry or segment.
The risk of trading the index CFDs is lower than stock CFDs. It may be related to the pattern of price volatility in both markets. However, index CFDs are leveraged to provide a cheaper option for traders. It is the reason why CFD trading is riskier than trading the underlying asset. To understand better about the risks of leveraged trading, see the explanation in The Advantage and Disadvantage of Leverage in Trading.
See also: Brokers Offering Index Trading
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Many investors diversify their portfolio into commodity markets during periods of stock market volatility. Commodities traded in the financial market are typically divided into four categories: metal, energy, livestock and meat, and agricultural.
The CFD version of commodity trading is based on price changes in the underlying commodity markets. For example, if you trade gold CFD, you just track the price changes of the precious metal without really having the asset.
See also: Brokers Offering Commodity Trading
Interest rate is calculated and charged on a daily basis on the contract value. The rate is usually calculated at a margin above (for long CFDs) or below (for short CFDs) the Reserve Bank’s interbank overnight cash rate plus/minus 2 to 3 percent.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a type of security that involves a collection of securities such as stocks or bonds. ETFs are in many ways similar to mutual funds. It is listed on exchanges and ETF shares are traded throughout the day just like an ordinary stock.
ETFs can be traded as Contracts-for-Difference assets. You don’t need to own the ETFs themselves, but you just trade the price changes on the underlying ETF asset. It means that you get the benefits of the price differences of the ETF without actually having the ETF asset itself.
Seel also: Brokers Offering ETF Trading
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or government). Bonds are used by companies, states, municipalities, and sovereign governments to finance projects and operations. There are a principal and interest that must be paid by the borrower to the bondholder.
CFDs can be traded on bonds, in which the aim is to seek benefits from the price changes. Thus, a bond CFD trader does not really participate in giving loans to the bondholder, and so they will not receive the yield from the bond.
All in all, CFD assets are essential for traders looking for the advantages of simple and short-term trading in the markets that usually have complex transactions. By predicting price changes in said markets, CFD traders can gain profits as simple as executing positions in the trading platform. They just need to analyze the price movements, looking for entry and exit positions at the right moment, and they will get profit from the price differences from which they enter and exit the trade. This simplicity has garnered many followers in recent years, so it is no wonder that the number of brokers offering CFD trading keeps increasing to this day.