Investment and saving are two pillars of an effective financial strategy. Thanks to modern technology, it is possible to make money from the comfort of one’s home. Contracts for Difference are not just convenient virtual tools. They eliminate the need to own any physical assets. Here is how trading CFDs works in South Africa.
It is estimated that over 15 million people are engaged in internet-assisted trading worldwide. The figure is only projected to grow as convenience and profit potential are undeniable. Colossal volumes circulate on the global financial markets. The currency marketplace alone has a turnover of 6+ trillion US dollars. Like currency pairs, CFDs are a popular dimension of online trading.
Evolution of Investment
Put simply, Contracts for Difference allow speculation on the price for some physical asset without ownership of the latter. The trader does not need to purchase any stocks or commodities. The only thing that matters is their price. This is a huge leap forward from the old-school market trades.
Consider the conventional stock exchange. Here, participants can buy or sell shares issued by businesses. For companies, this is a way to attract investor capital. For shareholders, it is an opportunity to capitalize on future corporate successes. Through buying shares, they own a percentage of the company (even if it is only a fraction of a percent).
For a shareholder, profit may be two-fold. First, some stocks entitle you to regular dividends. On the other hand, they may be sold after their price grows. In this scenario, the person owns physical shares. This requirement limits the number of potential investors. CFDs on stocks add a digital dimension making the market potentially profitable for anyone.
Today, we are used to remote operations and virtual money flows. Many consumers prefer credit cards to cash and digitization is increasingly pervasive. Humans now earn and spend money using their mobile devices. It is only natural that investment no longer requires heaps of documents. CFDs may be traded using both desktop and mobile platforms. The tools are digital, while profits are real.
Basics of CFDs
As the term suggests, this instrument is an agreement between the buyer and the seller. The subject of such a contract is a price change for an asset. There are several types of CFDs based on underlying instruments. These derivatives may be linked to commodities, currencies, market indices, or even cryptocoins. Regardless of the basis, the same logic holds: traders speculate on prices for the assets, but they never actually own them.
In addition to the absence of physical assets, you can benefit from attractive leverage conditions. Brokers like FXTM allow clients to boost their purchasing power with a portion of corporate funds. This way, you can trade more than you could afford with the money in your balance. Ratios vary between providers and different types of CFDs. It is also known as a trading ‘on margin’.
1. CFDs on Commodities
These are products whose price is independent of producers – it is set by the market. Examples include crude oil (e.g., WTI or Brent), wheat, gold, etc. As a CFD trader, you will not have to exchange any physical volumes of oil. All you need is financial foresight.
You can profit from both upward and downward movements. If you expect the price of the underlying commodity to shoot up, you can buy more CFDs while they are cheap. On the other hand, if you foresee a drop, you can sell the instrument, so you can buy back more of it later.
2. CFDs on Indices
A market index reflects the performance of a cluster of companies. Its value will rise or fall, which presents another opportunity for speculation. For instance, if your CFD is tied to FTSE 100 and projections are positive, you would purchase more of it. Here, you are dealing with a group of assets, rather than individual shares. This hedges risk, as the value is average and thus very unlikely to ever hit zero. Most popular CFDs are linked to blue chips or so-called ‘growth stocks’.
3. CFDs on Cryptocurrencies
The most popular coins at the moment are Bitcoin, Ethereum, Litecoin, and Ripple. In CFDs, these are always priced against the USD. Here, Contracts for Difference eliminate security concerns that are typical for crypto transactions.
A few years ago, markets were shocked by the rapid soaring of Bitcoin value. It is now clear that virtual money is here to stay, and it has revolutionized our perception of finance.
Summary of Advantages
CFDs are useful as a means of investment and diversification. Many traders who start with currency pairs add CFDs to their portfolios. The tool is associated with lower risk in comparison with individual shares, and it may be traded on margin. Finally, when other assets disappoint, CFDs can bring profit that will cover the losses.