Modern investment tools provide variety that was previously unimaginable. In the past, investors could only buy and sell shares on the physical stock exchange. Today, financial markets are digitized and accessible at the click of a mouse. Thanks to companies like FXTM, advanced investment opportunities are now open in South Africa. Contracts for Difference have gained traction due to their enhanced convenience.
How It Works
So, what kind of contract is it? This handy tool is an agreement between two parties. One of these sells and the other one buys an asset. The trader acts as the buyer, while the broker is the seller. The subject of their contract is the price for the corresponding asset. For example, in the case of CFDs on gold, the profit is based on the dynamics of the gold price.
The most popular trading platforms include MetaTrader 4 (MT4) and MetaTrader 5 (MT5). Both offer a convenient digital environment for connecting to global markets. There are dozens of indicators and charts that make forecasting easier. Mobile apps allow you to keep track of prices and manage positions on the go.
How to Pick CFDs
It may be tough to decide which category of CFDs is the most suitable. The instruments can be tied to a wide range of assets. There are CFDs on currencies, CFDs on shares, CFDs on commodities, and even crypto. Open a CFD trading account with a reliable broker in South Africa and use the educational material provided by the company.
Well-established brands make sure their clients have sufficient learning opportunities. CFDs are a popular finance instrument. This means tutorials, guides, and articles are not hard to find. Look at the latest market dynamics to identify the most promising assets.
Finally, compare conditions for different CFDs on your broker’s website. Different types of CFD accounts have different margin requirements, spreads, and commissions (if any). Compare trading costs and leverage terms. Leverage shows how much you can boost your purchasing power by borrowing the broker’s funds. Here are the three most popular types of CFDs.
CFDs on Commodities
These derivatives are linked to products like gold or crude oil. Their prices are set by the market regardless of individual producers. For instance, the price for WTI is valid for all companies that produce the benchmark oil.
A CFD trader does not buy or sell physical volumes of the resource. No barrels or tanks need to move. The profit is entirely price-based. If you expect the value to soar, you can buy more of the respective CFDs. In the opposite situation, you could sell the units you have and buy more of them later.
CFDs on Indices
Market indices like DJIA or FTSE 100 represent the performance of a certain group of companies. Their values rise or fall based on average values. This means they are unlikely to ever collapse to zero. A CFD hedges risk further as you do not need to own any physical assets. Most traders opt for blue-chip clusters or so-called ‘growth stocks’ which include shares of tech giants.
CFDs on Cryptocurrencies
Cryptocoins are known for their volatility. This provides ample opportunities for speculation. The four most popular coins today are Bitcoin, Ethereum, Litecoin, and Ripple. A Contract for Difference on crypto is always priced against the US dollar. Security concerns that are typically associated with sales of crypto are non-existent, as no coins change hands.
How to Pick a Position
Traders open positions based on their intention to buy or sell certain CFDs. A ‘long position’ corresponds to buying in expectation of a price rise. A ‘short position’ is opened when you wish to sell, expecting the value to take a plunge. Decision-making is facilitated by a wide range of charts and other tools on digital platforms. The position varies in size depending on how many CFDs (units) you want to trade.
Summary of Benefits
Contracts for Difference are modern instruments for online trading and investment. They can be traded on their own or included in diverse portfolios of assets. Unlike separate shares, CFDs are less dependent on the successes or failures of individual companies. Although CFD trading is still a risky form of investment, it has undeniable advantages over the old-school methods. It allows shrewd traders to reap profits without leaving their homes.