Contract for differences, commonly known as CFDs, are offered at KCM Trade on more than 200 instruments. This includes forex currency pairs, commodities, stocks and indices.
In this article, we go into detail about what contract for differences are, how they work, and what it means when you trade on CFDs.
Introduction to CFDs
A contract for difference refers to a contract between a buyer and seller, where the buyer pays the difference of the valuation of a specific trading instrument when the contract is opened against the value of the same instrument when the contract concludes.
Trading on CFDs allows traders to profit off the price movement of an asset without owning the actual asset, as traders primarily focus on the price change between the entry to exit. In other words, CFD trading is essentially the price of a trading instrument and not the underlying value of an instrument.
How CFDs work
CFDs are contracts between the broker and the client. The contract is initiated by the client through a buy and sell order opened within a trading terminal, such as MT4 or MT5. Every trading instrument has its own set of contract specifications that informs the client of the instruments’ unique conditions and, while not always the case, a spread that is charged by the broker upon the creation of an order.
Understanding CFDs
CFDs are unique in many ways, and it is advantageous to recognize why to mitigate risk and develop your own trading strategies accordingly. Here are just a few reasons why CFD trading continues to be a very popular form of trading:
Global Access
CFDs allow traders to trade on a wide selection of global trading instruments which are offered centrally through the trading terminal of their choice.
Affordability
Trading on CFDs come without the costly transaction and logistics fees that typically come when trading on assets through intrinsic ownership of an instrument.
Variety
Instruments available include Forex, Commodities, Stocks, and Indices. Instruments are centralized and traders do not require separate marketplaces or brokers.
Leverage
Trading on CFDs allows for higher leverage options than traditional trading. In KCM Trade, we offer leverage options that allow traders to trade with lower margin requirements and low required capital for opening orders.
To understand how leverage can help to mitigate risk, read our article on the leverage's impact on stop-out.
Short and Long Positions
Traders have the ability for short and long positions as buy and sell orders are accessible with no minimum requirements or step borrowing costs compared to traditional trading.
No Day Trading Minimums
While certain markets have imposed minimum daily trading volume requirements to be able to trade in specific instruments, CFDs do not have such requirements.
