April 13, 2021

What is CFD trading?

What is CFD trading?


If you are thinking of taking positions in the market more aggressively and in favor of volatility to deal with the uncertainty generated by geopolitical tensions or the uncertain future of Brexit, CFDs are a recommended alternative. Contracts for Differences or CFDs are derivative products whose value is based on their underlying assets, which may be a stock, an index, commodities, currencies, etc.

In short, it is a contract between a buyer (investor) and a seller (broker) in which the first establishes that the price will rise or that it will go down. When the contract is closed, if the price coincides with the chosen trend, the trader will receive a positive gain, whereas if it had been the opposite, it would register losses. The difference between the purchase price and the sale price is known as the spread.

The trader of CFDs does not physically own the asset that he exchanges and his objective is to benefit from the variation in prices. Also, it is important to note that CFDs are leveraged instruments. This means that investing in these instruments gives the trader the possibility of operating in the market through a small contribution.

In this sense, the investor only needs to deposit a percentage of the total value of the operation, so it does not have to have a capital too high to take positions.

One of the main advantages of this product is that you can earn money both in bearish scenarios and in bullish scenarios, something that does not happen with direct and traditional investment.

Another advantage of CFDs is that they give access to a wide range of assets and, since the underlying asset is never really owned, it can be traded in markets that would otherwise be difficult to access. In addition, unlike other financial instruments, CFDs do not have a fixed maturity date and therefore positions can be closed at any time. Of course, experts always recommend to operate with 'stop loss' (loss limit to sell) and 'take profit' (take profits) to cover, before the situation could turn around.

Be that as it may, the truth is that CFDs are presented as a good tool to obtain returns in the short or medium term and to make a first foray into the world of investment. Always, of course, with the help of professionals who can inform us and train us.

New regulation ESMA

Any investor that considers operating with CFDs should bear in mind that last summer a new regulation of ESMA (European Securities and Markets Authority) began to apply for this type of derivative instruments that are characterized by their great complexity. The main objective of this European regulation is to protect the retail investor, since these products carry a high risk and not all investors are qualified to operate with them. Within the framework of this new regulation, ESMA has set maximum leverage levels to ensure that no retail customer can lose more than they have invested in the operation. Professional clients, however, do not have limited levels of leverage.

Another novelty that includes the new regulation, which came into force on August 1, is that brokers are now obliged to publicly expose the percentage of investors who have suffered losses in the last year with this instrument so that the client has all the information.

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