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If you are looking to make some serious returns in your portfolio, derivatives can be one option. While derivatives can expose you to large risks, if you have mitigated those risks well enough, the returns can also be large. One such derivative is a CFD. Short for Contract for Difference, CFD traders make money from either rising or falling prices on the faster global markets. For example, Forex and Commodities.
Here, we look at the pros and cons of CFDs as well as what it entails to help provide a framework for trading tips that UK investors should keep an eye out for when trading CFDs. We identify the best CFD trading platform (UK investor centric though) and highlight how CFD brokers make money. Understanding how CFD brokers make money can help you identify which of the top CFD trading platforms listed below is right for you.
While knowing that CFDs mean making money from rises and falls in prices in the market, knowing what it really entails is a totally different concept. For, a CFD is an agreement between an investor and an entity like an investment bank or financial institute. They are, more often than not, extremely short in time frame. When the contract has come to an end, as set out in the CFD paperwork, the two sides involved then exchange any difference in what was the starting price and the finish price of the underlying asset.
There are a number of pros and cons to trading CFDs. It is essential that you are aware of all of them - and how they relate to your own investment circumstances and risk profile, before you start trading CFDs through a trading platform.
There are two stand out advantages to trading CFDs. Firstly, you can access a financial product and make money from it without having to buy the actual financial instrument. That means it is often a cheaper way of accessing capital markets and allows you to profit from those markets anyway. Bearing that in mind, it can be a very good way of making returns quickly, especially given how short dated some CFDs are.
Other advantages of CFDs would be that, while they do need some complex thought behind any initial investment idea, they are easy to execute on - often given the price and speed that CFDs are traded with. Finally, you can profit from predicting a downturn in the market without ever having bought an asset in that market initially. Short selling is where you can sell an asset without ever owning it, and then you can buy it back at a later date - hopefully at the lower price you predicted.
CFDs do have their drawbacks though. Firstly, while the speed of the market can be a good thing, it does also mean you can lose money quickly and easily too. Often, people borrow on the margin too and leverage their position, meaning that they are likely to lose even more cash - to the point that they very speedily clear out their broking account. Other disadvantages would be that the industry as a whole has a great deal less regulation than other markets have.
Finally, CFDs are complex. They are usually only used by experienced traders and they are, in fact, banned in some countries with other countries allowing them in very specific circumstances. The UK does allow them, hence why we have some of the best CFD trading platforms here, but it is definitely an asset class that potential investors need to be sure they understand inside out before starting to trade in them.
eToro has an incredibly interesting trading platform. Its product is a mix of social media and trading. In practice, that means that some investors can follow another trader and simply copy what trades that individual is placing. In fact those trades can be set up to be automatically copied by a person. It means you can closely align yourself to a CFD trader that you think has the potential to make a great deal of profit.
Plus500 is one of the best CFD trading platform for UK investors as it has so many fantastic features that allow a high level of technical analysis - which is much needed when looking to trade in CFDs. Another huge plus is that Plus500 provides investors the ability to trade CFDs on over 2000 instruments that include Forex pairs, ETFs, Shares, Commodities and Indices. In all that provides access to over 20 markets around the globe.
Capital.com has a huge customer base. It provides customers the ability to trade many different types of CFDs - which is a massive selling point as many investors want to trade CFDs to give them access to markets that were previously off limits to them. Capital.com is a broker that is regulated by the European Security and Markets Authority - giving potential customers huge comfort that Capital.com is highly regulated, despite trading CFDs.
There are a few ways that CFD brokers make money: fees, spreads and hedging. When it comes to using their services, potential clients will be most interested in the structure of the fees and how big a spread a CFD broker charges. The smaller the fee and the smaller the spread, the cheaper the service is. That being said, when looking for an answer to how do CFD brokers make money, it is also important not to dismiss the brokers with higher fees or larger spreads. The quality of their service may well justify it as well as being able to access a wider variety of instruments that some CFD brokers do not have.
Trading CFDs can be a very lucrative trading strategy - as long as you know what you are doing and how to time your trades optimally using the platform you have chosen. That’s why using the best CFD brokers in the UK is so crucial when it comes to CFD trading. It can make all the difference to your profits and losses - particularly if you are leveraging your positions. CFDs have often been the reason that even experienced traders have lost a lot of money, however, so always proceed with caution and be aware that you can stand to both lose or gain a great deal of cash.
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