While forex trading is not exactly a new thing, CFD (Contract for Difference), however, has only been around for just a little bit more than two decades.
Developed in the early 1990’s London, CFD allows traders to focus and trade on the underlying asset’s price movement in the actual market, without actually owning the underlying asset. CFDs were initially only used by hedge funds and other institutional traders; it was not until the late 1990s that CFDs were made available to the public till the late 1990’s. Its ability to leverage and the low costs for trading quickly made it a popular trading platform in many countries around the world.
Most of CFD trading’s characteristics are similar to the forex trading, but keep in mind that with CFDs, you can trade more than just forex. The range of products in CFD platforms often span across different financial instruments, giving the traders the convenience of trading many different financial instruments all on one platform and with global access. Trading index CFDs from different countries and commodities CFD, as well as forex, these trades can all be executed in one single platform.
Almost every CFD providers provide the trading service with no commission, charging only the spread for each trade. A spread is the difference between the buy and sell price, or ask and bid price. Making the spread a big factor when it comes to choosing the CFD provider. Some CFD providers use a fixed rate for the spread, some use a dynamic rate; which is a spread that is adjusted according to the market conditions. Evaluate all available options when you choose a CFD provider and make sure that you are well aware of all fees, potential fees and the information regarding the spread. Most of these information can be found on a CFD service provider’s website, for example, this CMC Markets Forex CFD trading page contain all the minimum spread for each currency pair.
Apart from trading with leverage, another reason that makes CFD so popular over the years is that it has a low entry threshold. In CFD trading, the minimum contract sizes are often very small, a great place for those who don’t have a lot of capital to start trading. The combination of the two allows a trader to have more exposure with relatively little capital in account balance.
Overall, CFDs trading has emerged as a popular trading activity, especially in volatile times, CFDs trading is commonly seen as a good tool to take advantage of the volatility of the market.
If you are planning to start trading CFDs, you may want to take advantage of the free demo account that most CFD service providers offer. With the demo account, you can trade with virtual money for free and get a better idea of the trading as well as the platform and services. Remember, each service provider has their own strength and weakness, and sometimes even the smallest thing can make a big impact in your trading experience. Don’t be shy to try out a couple different demo accounts and see what suits you the best.
Additionally, although trading CFDs is not the same as trading the actual underlying assets, your CFD service provider should still be regulated and licensed by a major oversight body in the government. The CFD trading is not currently available in every country (For example, it is not available in the United States, nor China), it is important to double check and ensure that your CFD providers are properly registered in your country or region.