What You Need to Know About Contracts for Difference - Introduction
How is a trader in a third world country able to buy and sell crude oil futures which are traded in London and United Kingdom? How are they able to invest in companies like Apple and Microsoft, which are listed in New York? What about coffee and cotton futures? What about currencies?
The answer to these questions is a financial instrument called Contracts for Differences (CFDs). In simple terms, CFDs are financial instruments that allow traders to buy financial assets which are pegged to the real assets. For example, when you buy a CFD for a company like Facebook, in reality, you have entered into an agreement with the broker. By owning CFDs, you don’t own a stake in Facebook and you are not liable to receive dividends. Also, you don’t get any shareholding value as a buyer. Instead, you benefit from the up and down movements of the assets.
In reality, without CFDs, it is impossible for people from the developing countries and some emerging markets to participate in the global financial markets. This is because, to participate in the business where you buy real stocks, you need to be an accredited investor and a citizen of the country.
Therefore, CFDs play an important role in ensuring that people from around the world participate in the market.
This comes with a number of benefits. For example, to trade in CFDs, you can buy or sell financial assets. By buying, you will benefit when the price of the price of the financial asset is moving higher. If your thesis is that the financial asset will move lower, you place a sell order where you benefit from the downward movements. This makes it possible for you to make money regardless of the financial conditions.
The second benefit about trading in CFDs is that you don’t have any legal obligation on a company. In the convectional investing, when you are a shareholder, it means that you can take part in the decision-making process. You can participate in firing the board and the CEO and even influence the decision of the management of the firm. As such, when there is a financial issue in the firm, you can lose more. As a CFD trader, when you sense that the stock is not doing well, you just respond by shorting it.
Third, with CFDs, there are thousands of financial assets you can trade in. If your expertise and experience is in the commodities market, there are tens of commodities to trade from. If you are perfect at stocks, there are thousands of stocks to trade from. The same is true with indices and currencies. At Day Trade The World, we offer thousands of financial assets from tens of exchanges to choose from.
To become a perfect CFDs trader, you need to understand a few things. First, you need to have a lot of interest on it. This will help you be able to spend tens of hours reading news and interpreting financial data. Second, you need to have access to financial materials like books and videos. Finally, you need to spend hours reading and doing the research about the financial markets.