Commodity CFD Trading | Detailed Guide Published By Experts
Navigating the world of finance often feels like walking through a labyrinth with ever-changing walls. Every turn can bring a new opportunity or a hidden pitfall. Within this vast landscape, CFD trading holds a distinctive position. A detailed review’ is poised to elucidate the intricacies of this complex yet rewarding financial instrument.
What are CFDs?
The Contract for Difference (CFD) is at the core of CFD trading. There are many types of CFDs, such as ETF, Bond, Cryptocurrency, Index, and commodity CFDs. This is essentially an agreement between two parties – the buyer and the seller. They agree to exchange the difference between the current asset value at the moment of concluding the contract (opening position) and its value at the time of the contract expiry (closing position).
A CFD is similar to a goods supply contract but with a crucial difference – the seller is not obligated to own a real asset when trading CFDs, and the buyer does not obtain the rights to demand delivery. If the asset price increases between the first and second transactions, the buyer gets the difference from the seller. Conversely, if the price drops, the seller receives the difference from the buyer. The contract can be terminated upon the statement of either party, granting flexibility in CFD trading.
Pros and cons of CFD trading
According to TU experts, CFD trading has distinct advantages and disadvantages.
- Higher leverage is possible.
- Trading a wide variety of asset classes on one platform or account.
- A single EA can be used for different classes of assets.
- There’s no need to hold assets or to register a wallet for Cryptocurrency CFDs.
- Low transaction expenses.
- Traders are not obliged to provide the underlying asset for CFD sale.
- In countries like England, stamp duty is waived on CFD transactions.
- Traders need not worry about the futures settlement date for Futures CFDs.
- Dividends or coupon payments cannot be received in case of stock or bond CFD trading.
- Forex brokers are often the contracting party for CFD transactions, necessitating a reliable choice of broker.
- CFDs are off-exchange contracts and are not strictly standardized.
- The regulation of the CFD market is weaker than that of the underlying asset market.
What type of CFD successful traders choose
The choice of a specific type of CFD depends on several factors which impact the success rate of CFD trading:
- CFDs have lower liquidity and higher volatility compared to currency pairs.
- CFDs do not envisage delivery of the underlying asset, meaning the trader will not receive dividends or coupon payments.
- Transaction expenses in CFD trading are often higher than in currency pair trading.
- Before starting to trade CFDs, thoroughly testing the chosen CFD for compliance with the used strategy is recommended.
The world of CFD trading is expansive, filled with opportunities and challenges. It offers traders a dynamic platform to explore different asset classes, leveraging market fluctuations without owning the underlying asset. We encourage readers to visit Traders Union’s official website to delve deeper into this fascinating realm.