Contracts for difference, or CFDs, have been confidently paving their way in the investment world, becoming one of the most popular and widely-used trading tools.
By choosing CFDs, a trader gains the ability to profit from price fluctuations of fast-moving financial instruments; whether their price goes up or down.
CFDs, being one of the most popular trading tools – offering leverage and the possibility to trade on margin – provide outstanding opportunity for ordinary people to enter the world’s top financial markets, without the need to spend a fortune on a single trade.
Another popular instrument, attracting traders’ attention, is an equity swap. It is also a derivative instrument, in which two parties pre-agree to exchange a set of future cash flows at a predetermined date.
As these two types of derivatives are often mixed up, let’s look closer at CFDs vs equity swaps.
Contract for difference
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Key features of CFDs
CFD is a leveraged product, meaning that a trader needs to deposit only a small percentage of the full cost of the trade. The rest is provided by your broker and is called margin. Trading on margin magnifies your potential return on investment. Still, you should always consider the risks, which may also be high.
Wide range of available markets
One of the major advantages of trading CFDs is a vast choice of available markets. You can trade on top global shares, indices, commodities, forex, and cryptocurrencies– the hottest new trend in trading.
Go long, go short
With CFDs you can trade on opposite price movements: go long, and go short on a market’s direction. If you believe the underlying asset will rise, you open a long position, and if you think the price will fall, you go short.
Note that a CFD trader will incur benefits and costs, regarding his choice of either short or long positions. A trader with a long positon will bear daily payment costs, but will get a dividend payment from the underlying equity (like with ordinary shares). Vice versa, a trader with a short position will bear a dividend payment costs, but will get daily interest payments, while short-selling the equity. Also, you should keep in mind that interest rates are fluctuate, depending on the market’s and a particular asset’s volatility.
No expiry date
Contracts for difference do not presuppose an expiry date. Unlike futures or options, you can always renew and prolong your CFD trades for as long as you want to.