A Derivative product is a financial instrument whose current price is based on another asset (underlying asset). This underlying asset may be a Forex Currency, a World Stock, Energy Asset, Precious Metal, Stock Index etc.
CFD trading is nowadays the best way to trade any financial market. Low cost trading, wide asset selection, high capital leverage, minimum deposit requirements and extremely easy-to trade platforms make CFD contracts very popular among traders. Here are the basics of CFD trading but first let’s see what is a Derivative Asset.
What is a CFD Contract?
CFD means Contract for Difference and it is an OTC (over-the-counter) derivative product. When you open a CFD position you gain or lose money based on the price of the underlying asset. CFD contracts are very and can be used for trading any Financial Market including Forex, Stocks, Commodities etc. CFDs enable traders to trade very easily a great variety of assets in very tight spreads.
While other derivative instruments use complicated formulas to determine their current values, CFD prices are identical to the underlying asset prices. That means that if you buy Crude Oil using a CFD contract you will buy and sell it almost at the same price as the current Crude Oil Price. That makes extremely easy to trade and to monitor your CFD positions.
Almost all CFD brokers charge only a spread between Bid and Ask and no trading commissions. Usually you can trade EURUSD in less that 2 pips spread, trade Dow Jones in 2 points spread, trade DAX in 1.8 points spread etc. If you keep your positions after midnight, your position may be subject to overnight charges (SWAP Rates) but if you trade CFDs on Futures you pay no SWAP rates at all. That makes CFDs ideal for Swing Trading of 1-2 months.
Your profit / loss when you trade CFDs can be easily calculated. Simply, if the price of the underlying asset has risen between the time you have opened your position and the time you have close it, you have make a profit. If the price of the underlying asset has fallen below, then you suffer a loss.
Stock-Indices trend very well without the annoying 'market noise' of other financial instruments. That means you can ride a strong trend using high capital leverage and by placing a narrow stop-loss order. The spreads when trading popular indices are considerably tight.
Trading shares is completely different and you should use very limited capital leverage. Do not trade shares intraday.