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Over the past decade, CFDs Contracts For Difference have become the most popular way for online investors to trade stocks, commodities, indices and currencies.
As with everything that grows so fast, there is a lot of disinformation surrounding CFDs. Here we will go back to the basics to explain what a CFD is and what are its implications for investors such as yourself. It means that you do not own the actual asset, but rather, you engage in a contract with the owner in this case, the trading platform , to settle the difference between yourselves when the deal has concluded.
The logic behind trading CFDs is pretty much the same as investing in any other market, like stocks for example. With CFDs, the major difference is that your investment is now a contract which offers you more flexibility than owning the real stock: When investing in stocks using CFDs and no leverage 1: One of the big advantages of investing in CFDs, rather than in markets like commodities or stocks, is that you can profit from falling markets as well. CFDs make it possible to invest smaller amounts in the markets of your choice.
However, with CFDs, you can speculate on index performances, which enables you to invest not just in one stock but in whole sectors of national economies. Any financial investment involves risk, and CFDs are no different. On eToro for example, you can invest in any asset without any leverage. The similarity is that they are both derivatives: However, while ETFs are composed by financial institutions following a specific market strategy often used to hedge risk , a CFD is offered by a broker to enable access to private users.
Similar to ETFs, CFD trading can be used to create a portfolio which follows a market strategy, giving the user absolute control over the assets they choose to hold, and enabling them to manage their own risks. Most assets on eToro are traded as CFDs and are executed during specific market hours.
What is a CFD? How do CFDs work? Can I only profit when prices are going up? Is the minimum investment in the stock equal to its market price? Are there assets unique to CFDs? Are CFDs riskier than traditional market investments?