Many people have heard of CFD trading. However, many people don’t really understand what CFD trading is all about. The CFD trading contract itself is nothing more than a derivative. Derivatives are contracts that allow for future payment and receipt of payments.
In financial markets, a derivative is a contract in which a person or entity exchanges their debt (liability) for an asset (asset). In the world of CFD trading, when you purchase shares from a share broker, you are purchasing (not selling) a contract that allows for you to sell your shares at a later date at a predetermined price. The “contract price” is the initial deposit of the share. The “derivative price” is what the broker or dealer will sell your shares at when you request them. CFD trading is similar to exchange traded funds (ETFs), except instead of buying ETFs through a broker, you are trading shares and the contracts that allow for this activity.
There are numerous reasons why traders choose to trade CFDs instead of gold prices in the financial markets. CFD trading does not involve the commission cost that occurs when trading shares. CFD trading does not require you to purchase shares at a particular price, instead you can sell your shares anywhere from a small percentage (100 shares) to a large percentage (a few hundred shares) over the course of a day at any time. In addition, you can take advantage of leverage; meaning you can increase the amount of leverage that you have on your contract; and this leverage will only increase your profit.