Traders can speculate in both rising and falling markets, which means traders can find ample opportunities in both bull and bear markets.
CFDs have become increasingly more popular as trading instruments, as they give traders access to trade a variety of different asset classes and the ability to use leverage. They are cost-efficient and provide traders with a high level of flexibility.
CFD trading provides access to a wide range of markets. In this post, we will look into some of the different CFD trading markets you can explore:
How Do Contracts for Difference Work?
CFDs represent financial instruments that enable traders to speculate on market directions without owning the underlying assets. In CFD trading, traders enter into contracts with their brokers, agreeing to exchange the difference between the opening and closing prices.
When engaging in CFD trades, there are two crucial prices to consider: the buy price and the sell price. The choice between these two prices depends on the trader’s anticipation of whether the price will increase or decrease.
Long Position: A trader assumes a long position when they believe the price of the underlying asset will rise. For instance, if a trader expects an increase in the price of gold, they will buy XAU/USD. If the trader closes the position at a higher price than the opening price, a profit is realized. However, if the position experiences a decline, a loss will be incurred.
Short Position: A trader takes a short position when they anticipate a decrease in the price of the underlying asset. For example, if a trader predicts a decline in the EUR/USD, they will initiate a short position in the currency pair. If the trader closes the position at a lower price, a profit is achieved. Conversely, if the position rises, a loss is incurred.
How Traders Can Access the CFD Markets
In order to participate in CFD trading, traders must identify a suitable broker and proceed to open a live trading account. It is important to be aware of the different types of CFD providers and determine which one may be better suited to individual needs.
Market Makers: Market makers are brokers who assume the risk of their clients’ positions instead of hedging them with liquidity providers. In this setup, the broker’s profit is derived from the client’s losses, and vice versa.
STP (Straight-Through Processing): STP implies that there is no manual intervention by the broker during order execution. Brokers operating under the STP model have a vested interest in the profitability of their clients, as this encourages increased trading activity and client retention.
DMA (Direct Market Access): DMA shares similarities with STP. However, the key distinction lies in the fact that STP brokers can directly fill orders and hedge them with liquidity providers, while DMA involves orders being sent directly to the market and filled based on the pricing received from liquidity providers.
ECN (Electronic Communications Network): An ECN broker employs an ECN to automatically match buy and sell orders. This allows for direct interaction and trade matching between multiple market participants.
Different CFD Trading Markets
It’s important to note that while CFDs provide access to these markets, they are derivative products, and trading them involves risk. Make sure to understand the characteristics and risks of each market before engaging in CFD trading.
- Stock Market
CFDs allow you to trade shares of individual companies listed on major stock exchanges. You can speculate on the price movements of popular stocks without owning the underlying assets.
CFDs enable you to trade on the performance of stock market indices, such as the S&P 500, FTSE 100, or DAX 30. You can speculate on the overall movement of a specific market index rather than trading individual stocks.
- Forex (Foreign Exchange)
CFDs allow you to trade currency pairs in the forex market. You can speculate on the exchange rate fluctuations between different currencies, such as EUR/USD or GBP/JPY.
CFDs provide exposure to various commodities, including precious metals (gold, silver), energy (crude oil, natural gas), agricultural products (corn, wheat), and more. You can trade these commodities without owning the physical assets.
CFDs allow you to trade popular cryptocurrencies like Bitcoin, Ethereum, or Litecoin. You can speculate on the price movements of these digital currencies without directly owning them.
- Bonds and Interest Rates
CFDs give you the opportunity to trade on government bonds and interest-rate products. You can speculate on the yield movements of bonds or the direction of interest rates.
- ETFs (Exchange-Traded Funds)
CFDs provide exposure to ETFs, which represent a basket of assets like stocks, bonds, or commodities. You can trade ETFs based on their price movements without needing to purchase individual assets.
- Options and Futures
CFDs offer the ability to trade options and futures contracts. You can speculate on the price movements of these derivative instruments without owning the underlying assets.
- Share CFDs
Share CFDs are among the most frequently traded contracts in the CFD marketplace. In such contracts, the price of the CFD is derived directly from the price of the underlying stock. Traders familiar with stock trading will find that trading share CFDs is quite similar in nature. Nevertheless, it is important to be mindful of certain distinctions.
- Treasury CFDs
When traders wish to speculate on the value of treasury notes, they can opt for treasury CFDs. These CFDs allow traders to engage in trading various types of treasury notes, such as US Treasury Notes with different maturity periods, US Bonds, Euro-Bund, and Australian Treasury Bonds.
- Sector CFDs
CFDs provide the opportunity to profit from growth areas globally, regardless of their geographical location. With the ability to go both long and short, traders can also benefit from declining sectors of the economy.
Sector CFDs allow traders to take a holistic view of the economy, selecting sectors like healthcare as promising areas of growth. This eliminates the need for analyzing individual companies, as traders can focus on identifying profitable sectors based on the broader economic landscape. Sector CFDs offer built-in diversification, reducing volatility when compared to trading individual stocks.
It is important to note that sector CFDs generally have wider spreads compared to CFDs on individual stocks. If the targeted sector is dominated by a few large companies, it may be more cost-effective to trade CFDs on those individual companies instead of opting for the sector CFD.
- Carbon Trading CFDs
A recently introduced and highly volatile contract for difference (CFD) revolves around futures contracts on emissions values, which are both politically and environmentally influenced. This concept involves a carbon pollution program where participants are granted permits to emit a certain amount of gas. If they succeed in improving their performance by reducing emissions, they can sell their excess permits to others in need.
The price of carbon emissions has exhibited fluctuations in recent years, ranging from 8 to 30 Euros per ton, with an average value of around 13 Euros by the end of 2009. Notably, a Shell executive estimated the actual cost of eliminating one ton of carbon dioxide to be closer to 72 Euros.
Building upon this backdrop, Saxo Bank has introduced a CFD product based on emissions futures. The minimum trade requirement is 25 tonnes, with a 10% margin, making it an appealing yet challenging trade to predict.
Author Bio: Andrea Ollero, a writer and market analyst, has 5 years of expertise in writing beginner-friendly trading techniques, tutorials, and advice. Also, she suggests FP Markets as the top broker for trading CFDs and forex.