What are CFD transactions and how do they work?
CFD trading is also known as “buying and selling CFD” and means “contract for difference”. CFDs allow you to trade only the value of anything in financial markets such as forex, indices and commodities by speculating on prices without the need to own the underlying assets. Join Zand Traders as we tell you everything you need to know about CFD trading.
Familiarity with CFD trading
Generally in these transactions, you agree to exchange the difference in the price of an asset from the point the contract starts, until the expiry of the contract. One of the main advantages of CFD trading is that you can set the expiration time of the contract based on your guess about the prices. In this way, your profit or loss depends on the accuracy of your prediction.
Comparison of CFD trading with futures trading
In futures transactions, the contract is closed for a certain period, and at the maturity of the contract, it is necessary to pay the seller at the price of the day. In this type of transactions, if the stock or value purchased has increased in price, the buyer will loss.
In order to solve this problem that existed in futures trading, an amendment was made and CDF trading was introduced. In these transactions, the contract maturity was removed, and traders can manage short-term or long-term transactions whenever they like.
In this way, there is no more stress for the expiration time of the contract, and the more skilled the
trader is in guessing the prices, the more he or she can benefit from CFD transactions.
How does CFD trading work?
In fact, CFD trading is like buying and selling contracts, through the difference in the value of an asset to earn profit, with an online broker.
An important advantage of CFD trading is that even when the price falls, the trader can make a profit. You must be asking how? In the following, we have explained how this type of transaction works with an example. Please stay with us.
An example of CFD trading
Assume that you buy a company’s stock at a current buy price of $41 and a sell price of $40. But your prediction is that the price of this stock will reach $39 in the next few days. Therefore, you sell a part of your share, for example, about 100 shares for $40.
In the coming days, if your guess is correct, and the stock price drops to $39, you will buy 100 shares worth $39. In this case, despite the downward trend in the market price, you have made a profit.
Advantages of CFD trading
Up to this part of the article, you have become familiar with CFD transactions and you have become aware of how such transactions are carried out. If you want to know about the advantages of these transactions, read this part of the article carefully.
-The cost of doing these transactions is low.
-It is possible to carry out such transactions anywhere in the world and at any hour of the day or night.
-It is possible to earn profit in both rising and falling markets.
-It is possible to trade with margin in these transactions, and despite this, you can work with more capital.
-Trading options in CFD trading are very diverse.
Final word
To be successful in CFD trading, it is necessary to be able to correctly guess the upward or downward trend of prices. CFD trading has made it possible for you to decide the time to exit the trade without the worries you had in futures trading, easily and without the existence of a contract deadline.
