Among the many tools available to traders to invest in stocks, CFDs are among the most popular and traded. So let’s see what CFDs are and how they work, what are the benefits and risks of CFD trading and what are the best CFD brokers to trade on.
CFD Trading: What it is and How it Works
The term CFD stands for Contract for Difference. It indicates a particular investment tool that allows the investor to obtain profits on the basis of the price difference recorded at the moment of the opening of the position compared to the price recorded at the moment of the closing.
The price of CFDs, in particular, depends on the value of the underlying asset, i.e. another financial instrument, which can be cryptocurrencies, stocks, forex exchanges, binary options, indices or commodities.
Those who trade with CFDs do not obtain the underlying financial instrument, but rather a security which replicates the value of the same. CFD trading is therefore based on the difference of the latter at the moment of purchase versus the moment of resale: if the former is lower than the latter, the trader will obtain the corresponding profit, if it is higher, a loss will be generated.
Advantages and Risks
CFDs are particularly convenient instruments, and among their numerous advantages we find:
- The ability to maximize profit by using leverage. Using this instrument, the trader can pay a small initial percentage and obtain earnings for the coefficient established with the leverage (x5, x10, x 15, etc.).
- The possibility of generating profit both when the market follows an upward trend and when it follows a downward trend.
- They can be traded easily not only in Europe, but also in the United States and England.
- They can be bought in relation to any type of financial instrument and traded on a wide variety of markets.
However, CFD trading can present several risks for inexperienced traders or can become highly speculative:
- Abusing leverage can in fact generate both large gains and large losses.
- The volatility of financial instruments can cause them to change price very quickly, so you could easily miss the opportunity to sell your CFDs at the most convenient time.
- Open positions usually have a cost that varies from platform to platform, so keeping them open for too long could generate high commission costs.
- Before opening a position and using tools such as leverage, it is always advisable to prepare a proper trading strategy that also uses Stop Loss and Take Profit signals, which are extremely useful for both maximizing gains and limiting losses.
Best CFD Brokers
Before you start trading CFDs, you need to be properly informed about the conditions and rules of the chosen broker. In this regard, let us see some of the best CFD brokers for online trading.
The eToro broker has clear and comprehensive regulations, Cysec, FCA, MiFID and ASIC licenses and is trusted by millions of traders around the world.
On this platform it is possible to invest in a wide range of financial instruments and Spread commissions are among the lowest on the market. The platform’s integrated portfolio allows you to easily trade any type of security and is compatible with many official currencies. There are also various technical tools, such as Stop Loss, Take Profit and Financial Leverage functions (up to 1×30).
eToro is an excellent broker even for less experienced users: the possibility of opening a free Demo Account allows them to become familiar with the functionality of the platform without immediately investing real capital. The CopyTrading option, finally, allows you to copy in your portfolio the operations of more experienced traders.
To sign up on eToro, simply go to the home page of the official website and click on the Sign Up Now tab at the top right of the screen. The procedure requires only a few details, such as username, email and password.
XTB broker is used annually by thousands of traders who appreciate it for its clear rules, multiple licenses (Cysec, FCA, KNF, BaFIN, CNMV, AMF, Cysec, FSC and CONSOB) and its efficient support service.
XTB offers traders three different account types: Demo (free), Standard (commission free) and Pro (dedicated to more experienced investors). Traders can also choose between two highly functional and powerful trading platforms: MetaTrader 4 and xStation 5.
To trade CFDs on XTB no minimum deposit is required and the account can be replenished with a bank deposit or a transfer from credit cards or other e-wallets. To register with XTB you need to go to the home page of the official website and choose between the options Create Demo Account and Create Real Account. Then simply enter the data required by the wizard.
The Plus500 broker is particularly appreciated for its versatility, as it is possible to trade in a wide range of financial markets and a wide range of securities, including CFDs. This platform is considered to be one of the safest platforms due to the presence of excellent regulation and Cysec, ASIC, CONSOB and FCA licenses.
Traders can choose to use Plus500 by installing the dedicated software directly onto their computer, using a Web App or by downloading the relevant Mobile App to their Smartphone. Plus500 features a user friendly interface, the ability to open a free Demo Account, a user-friendly platform and a wide variety of trading tools.
To sign up with Plus500 you need to go to the home page of the official website and click on the Start Trading Now tab. Alternatively, you can create a free Demo Account now and explore all of the platform’s features.