What are CFD's ?

In simple terms, a CFD (Contract For Difference) is a contract that you sign up with your broker to exchange the difference between the buying and selling price of the contract. It is a way of trading in financial instruments which is quite unlike conventional share trading.  Here, you would not hold the shares in the physical form. Instead, you would own a contract. The price fluctuation of the underlying instrument would provide you the opportunity of making profit. The most important thing to consider here is that CFDs are a good way of taking advantage of short-term price fluctuations but they also carry a significant amount of risk. Thus, instead of making profits, you might as well end up making huge losses. While opting for a CFD, you must be very careful about risks involved.

How is it Different from Share Trading?

The major difference in CFDs and conventional trading is that you don’t need to pay the full value of the underlying instrument initially for CFDs. Herein with a very small initial outlay you can get a very large exposure to the underlying instrument. This would magnify the profits as well as losses that you make. Therefore, you need to understand that you may also end up losing much more than what you paid initially. 

What Are its Benefits?

CFD trading also has some benefits. Here are a few important ones:

  • Small capital outlay- you can get the exposure to an instrument of much higher value even with a very small initial deposit.
  • Reduces the cost- it reduces the cost associated with stock trading. As there is no physical holding, there is no need for paying stamp duty on purchases.
  • Benefit from falling market - by estimating the direction of price correctly, you may even end up making profit in a falling market. If you predict that the prices will fall in the near future, you can sell today and purchase later on at a lower price. Hence, in a falling market, you will actually be making profit with CFD trading.

What Are the Things to Consider?

Here are the two important things that you need to consider before getting into CFDs: 

  • Risk element - there is a high risk element in CFD trading. So before you make up your mind, make sure that you are ready to bear the risk.
  • Understand the basics - once you get started, try to learn more about the basics of this kind of trading.

Thus if you have a high risk appetite and want to trade in different types of financial instruments, CFDs may be the thing you are looking for.