CFDs, what they are and their main characteristics

If you are looking to earn extra money online you probably already have noticed the variety that exists to choose. Among the alternatives available today we are going to talk to you about CFDs .

Logically, the first thing will be to see what the CFDs are and then we will also see their main characteristics. Go for it.

Glossary of the content of the article:

Regulated brokers to invest in CFDs

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What are CFDs?

It should be noted that the term CFD comes from the English ” Contract for difference“, which means contract by difference. A CFD is a contract by which the difference in the price of a financial instrument is exchanged at the time of opening and the price of its closing.

Therefore, the CFD reflects the performance of the asset without having to own the underlying instrument itself. Mainly CFDs are derivative instruments, which means that they are not listed on an organized market.

Today CFDs are an increasingly common negotiation tool among small investors, and its flexibility in operating and easy access to the product allow it to be a very interesting alternative to more traditional investments.

Characteristics of CFDs

Contracts for differences have very interesting characteristics that undoubtedly invites us to try them.

And now let’s see some of these features:

  • The price of CFDs is established based on the prices of the underlying asset.
  • How to trader, you will receive the difference between the start value and the value at the end of the operation.
  • The CFDs also offer the possibility of benefiting from the fluctuations of the assets, and without needing to have the physical instrument.
  • They offer the opportunity to execute short positions .
  • They allow to obtain benefits even in the fall of the quotes.
  • Liquidity is linked to the underlying asset, so depending on the assets that you choose more or less liquidity you can enjoy in your operations with CFDs.
  • The leverage will allow you to enjoy a greater investment in the market without the need to disburse the total of the operation.

 

The operation of the CFDs

Regarding its operations, we have different ways of reaching Contracts by difference. We have the dividends, subscription offers and mergers.

The hours to operate will depend on each underlying asset and the same with the issue of guarantees.

So whenever you are going to operate you will have to consult it very well, to know which assets are best for you and which ones can be much more accurate movements.

Unlike investments in other types of financial instruments, for example, CFDs allow you to invest in both long and short positions, while investments in securities will allow you to do so in the long term .

On the other hand, investments in CFDs will allow you to invest with leverage, which is great because without having to pay the total investment you can increase your returns through these “loans”.

Today CFDs have become a product of support in the investment portfolios of many investors, since they work very well as hedge trading. Also, this product helps us generate high returns in intraday trade and is that they are settled on the day, so they are perfect to operate.

In the same way, trading with CFDs has many advantages, since speculative positions can be adopted both upwards and downwards and achieve profits in almost any direction of the market. This is undoubtedly a point in favor, to be taken into account.

What are the advantages and disadvantages?

To finish, I would like to give you some reasons why it is good to choose Contracts for difference for your investments. And how not everything can be good I would also like to leave you some warnings, so you do not neglect yourself and you can fully enjoy your trading experience with CFDs.

Advantage:

  • Investments are leveraged, allowing you to invest more capital than is available.
  • It allows you greater flexibility and easier to diversify your portfolio.
  • The guarantees depend on the underlying assets you choose.
  • They allow you to carry out different investment strategies .

Disadvantages:

  • Everything has to be seen in the chosen underlying asset itself, so you will not have market depth or available volume.
  • Being a product for intraday investments, they charge commissions for maintaining open positions from one day to the next.
  • CFDs are traded in OTC (Over the counter) markets, that is, they are not organized. In addition, depending on the values ​​in some cases the brokers make Market Maker balancing the market to give liquidity to the positions.

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