The asset markets are continuously changing by day as more people join in and experts develop new strategies. One of these developments is the CDFs (contract of difference). As the assets trade and the market churns continuously it has brought about a new market of its own. The CDFs market is unencumbered by the normal asset’s market, which explains its popularity in the recent times. It also offers more advantages in comparison thus; it is more lucrative and attractive for an increasing number of traders.
What are CDFs?
The contract of difference is the trade of units developed forms the entry and exit movements of asset prices in the traditional market. What makes the difference for the CDFs is that not transference of assets occurs and only the price movements happen. Therefore, no bonds, shares, forex, or future exchanges are involved thus the CDFs markets popularity in the past decade. To trade in CDFs, the client needs to draw up a contract with their broker and start the trading. Generally, the CDFs market offers many investors extensive benefits while trading without having to follow the traditional market’s regulation.
How CDF Markets Work
When purchasing an asset worth $10 the investor may choose to buy 100 units and thus the total price is $1000 plus the commission and any additional fees. For the traditional markets, the investor opens an account with 50% leverage and deposits $500. The CDFs tarred only needs a 5% margin or $50. If the spread at the time of purchase is $10, the CDFs trader only incurs a $10 loss. The asset as to gain a spread of $10 in order to gain the standard value.
When the assets gain a price of $10 the traditional market investor gains increase to $20. This is a way the investor gains a 4% profits. For the CDFs trader, the profits are increases since they gain a 20% profits on the investment. That is, 10/50 = 0.2 which is 20%. The CDFs markets, therefore, gain faster compared to the traditional markets.
Pros and Cons
- Access to global markets. The traditional markets have restrictions while dealing with international markets. However, most brokers dealing with CDFs deal in global markets thus broadening the market variety for their clients.
- No shorting and borrowing rules. Most traditional markets have shorting policies, which require the investor to borrow the assets before shorting. The CDFs, however, are free of these rules since the trader does not actually own the actual assets.
- Have greater leverages. The CDFs markets have standard leverage starting for as low as 2% and going up to 20%. With the low margin requirements, the trader enjoys greater return at a reduced capital input.
- No day trading requirements. Most traditional markets have the minimum and maximum amount an account can make on day trades. For the CDF account, the trader can make any amount of day trades. The accounts also open for as low as $2000 to $5000 for the common prices.
- Variety. The CDF brokers deal with the whole variety of assets just as the normal markets thus this can come as an alternative.
- Not much regulation in the market. For the CDFs markets, the brokers’ only credibility is by their prowess, lifespan, or reputation. It is therefore imperative that you investigate before getting into the business.
- The trader pays the spread. In order to transact the trader needs to pay the spread exit and entries. This is what profits the brokers and they hardly ask for a commission. The prices of entry and exits depend on the underlying asset’s volatility in the market.
The CDFs markets come with advantages, which greatly overweigh the disadvantages. The added leverage rates allow for greater margins. This, however, is a double-edged sword since it also magnifies the losses if they occur. The FX cdf trading, however, provides a lucrative alternative for the normal exchange market. With the new trading platforms, coming into play you can now explore this option fully and enjoy the advantages.