Contract for Difference (CFD)

When we talk about Forex trading, people always wonder if every lot made means the exact amount of value held in our hand. My answer is absolutely No.

We conduct trade with brokers instead of making currency exchange directly with the counterparties in the market. Brokers work as a linkage between the market and us through the contract for difference (CFD). For brokers, they earn the basic trading fees agreed beforehand, which is referred to as the cost of trading.

The CFD offers Forex investors an opportunity to profit from price movement without owning the underlying asset. It's quite straight that people earn the profit generated from the differences between the enter position and the exit position. The contract is similar to the betting between you and your friends on the football match. You don't have to own a football team before the betting. Brokers provide services including finding the counterparties with opposite expectations, computing profit or loss, and making the delivery. Investors always initiate withdrawals to secure their profit. Investors have the right to withdraw any amount they like at any time. However, brokers make the settlement only in a fixed period base on the outcome of the CFDs.

CFD is utilized everywhere in the global market

Some advantages of CFD

1. CFDs provide higher leverage than traditional trading. It enlarges your buying power to meet higher capital requirement.

2. Many CFD brokers offer products in all the major markets worldwide, allowing around-the-clock access. Investors can trade CFDs on a wide range of over 4,000 markets globally.

Some disadvantages

1. CFD trading is fast-moving and requires close monitoring. You need to maintain your margins, otherwise your broker will close your position anyway without your permission if your available capital cannot cover the loss in values.

2. The CFD industry is not highly regulated and monitored by the government. There are excellent CFD brokers, but some other brokers are not trustworthy due to the background.

If you want to know the information of the brokers you are interested in, please follow WikiFX up and download the APP.