CFDs are typically traded online through the use of an electronic trading system. Contracts for differences (CFDs) are leveraged derivative financial vehicles. CFDs are derivative products because their benefit is obtained from the value of another resource. A forex trader receives quotes real time and can execute his/her trade at the drop of a hat.
One of the easiest ways of trading CFDs is by using a CFD Online trading platform (for example – iFOREX trading platform, meta trader etc). These platforms will provide the forex trader with user friendly options which will allow the trader to check prices regularly and execute their trades with lighting speed.
A CFD brokerage account will allow a forex trader to engage in trading assets without the requirement of owning those securities, particularly if trading those securities requires a good amount of capital to control a position.
For example, trading a crude oil contract or a stock index will typically require a great amount of money if the trader is placing his/her trades on a standard exchange. However, trading these securities on CFDs through a CFD Online platform through spread bets allows the trader to leverage their position and not have to cough up a lot of capital out of the starting gate.
There are also different types of CFDs brokers. There are market makers and direct market access providers. In addition, there are some providers which provide both models of CFD trading (both direct market access and market makers). It is solely up to the forex trader to determine which broker type suits their trading model.
A market maker typically operates a traditional spread bet where the forex trader must trade directly against the CFD provider/market maker. With a market maker the commissions along with the capital requirements are lower, however, there can be issues associated to conflict of interest. When trading with direct market access providers for CFDs online the traders orders are submitted directly to the order book. The trader has the option of submitting a limit order to either buy on the bid price or sell at the ask. Also, direct market access providers usually charge higher commissions.
When choosing a CFD broker there are certain variables the trader needs to consider; is the CFD provider licensed to provide their services in the country of domicile, are there rules/conditions associated to the way the broker handles monies, what commission charges accrue to the traders account, is the country that you are placing your trade in limited by what can be traded as CFDs etc.
An example of how a CFD works is when a trader looks to purchase the CFDs in company X shares. If the value of X companies shares rise in value and the trader closes his/her position in the CFD contract, the trader on the opposite side of the CFD contract would have to pay the buyer of the CFD the spread in the current price of X shares and the price when the contract was initiated. Conversely, if the shares in Company X decrease in value the trader would be required to pay the difference in value to the seller of the contract.
In closing, trading CFDs Online can be a lucrative opportunity for a forex trader; however, the trader should have a full understanding on how CFDs work and the different types of brokers that are presently in this market space.