Most people in the Middle East know about share market investing. To make a profit, you purchase a specific number of shares of a company and sell the same, preferably at a price higher than the buying price.
But what if you were not required to purchase the shares or the underlying asset directly and still take advantage of upside and downside short-term price movements? A CFD turns this possibility to reality. Look at what it is and how it works
What is a CFD?
A CFD or Contract for Difference is a derivative product. It derives its value from an underlying asset, eliminating the need for the trader to purchase the underlying asset.
By purchasing this contract, you agree to exchange the difference in the underlying asset’s price from when a position is taken to when it is exited. Two of the most significant advantages of CFD trading over stock trading are short selling and availability of leverage.
What Does Short Selling a CFD Mean?
Unlike stock trading, where you first buy shares at a lower price and then sell at a higher price, CFDs allow you to open a position by selling higher first and then closing the trade by buying at a lower price.
For instance, if your analysis suggests that the price of Google (GOOGL) shares will fall in the short term, then you can short sell a CFD of the company. If the price falls as per your analysis, then you can close the trade at a lower price. The difference between the selling and buying price multiplied by CFD quantity will be your profit.
What is Leverage in CFD?
Let us assume that you’d like to purchase 100 shares of Apple (AAPL) at $148 per share. You will need $14,800 to complete this purchase. As this is a cash position, you’ll have to pay the entire amount upfront for taking this position. But CFDs work on leverage. In other words, you only need to pay a certain percentage of the total cost of the contract for taking the position.
For instance, an online trading platform might only require 5%-10% upfront for purchasing an AAPL CFD of 100 qty. So, you can open a position for only $740-$1,480 and not $14,800. But note that the profits and losses will be calculated on the total CFD quantity and could significantly exceed the initial deposit.
The profit will be $100 if the AAPL price rises to $149 from $148 as you hold a CFD of 100 qty. Similarly, the losses will be $100 if the price falls to $147.
Different Types of Assets That Can Be Traded with CFD
While stock CFDs are commonly traded in the Middle East, CFD currency is also gaining widespread popularity. With forex CFDs, you can buy/sell top currency pairs, including EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD, and more.
Other options such as commodity CFD and index CFD are available for traders in the Middle East. However, these offerings can vary between brokers.
CFD Trading in the Middle East
CFDs are an excellent way to diversify your trading portfolio and gain exposure to the most traded US securities. But while CFDs offer a host of advantages, they carry a significant level of risk and should only be considered by experienced traders and investors.
Some top brokers also offer demo accounts to help traders practice and experience how CFDs work in the real world. Choose one such broker to get hands-on experience before trading with real money.