There are many different markets to choose from when trading CFDs, and each market has its unique characteristics and offers different opportunities for traders. This article will look at the most popular CFD markets: Forex, stocks, and commodities. We will examine the features of each market and discuss why they are popular among traders.
What is a CFD, and how does it work?
CFD stands for Contract for Difference, and a CFD is a type of derivative trading product that allows traders to speculate on the price movement of an underlying asset. CFDs are traded on margin, meaning that only a small deposit is required to open a position. It makes CFDs an attractive option for leveraged trading, as you can gain substantial exposure with a small amount of funds.
When you trade CFDs, you do not own the underlying asset; instead, you speculate on its price movement on the market. If the cost of the underlying asset moves in the direction you have predicted, you will make a profit. If the cost moves against your prediction, you will incur a loss.
The different types of CFDs available on the market
A wide variety of CFDs are available to trade, with new products being introduced all the time. The most popular CFDs are based on Forex pairs, stocks, and commodities. However, CFDs are also available to track underlying assets such as bonds, indices, commodities, and ETFs.
Forex
It’s the largest financial market in the world, with a daily turnover of over $5 trillion. The FX market is open 24 hours, five days a week to retail traders, and offers many currency pairs to trade. When trading Forex CFDs, you are speculating on the price movement of a currency pair. For example, if you think the EUR/USD currency pair will rise in value, you will take a long position. You will take a short position if you think the EUR/USD will fall in value.
Stocks
CFDs on stocks are also very popular among traders. A stock CFD is a contract that allows you to speculate on the price movement of a company’s shares. When you buy a stock CFD, you effectively buy the underlying shares. If the price of the shares rises, you will profit; if the price falls, you will incur a loss. You can trade CFDs on shares from all over the world, including the US, UK, and Australia.
Commodities
Commodity CFDs allow you to speculate on raw materials such as gold, silver, oil, and gas price movement. Commodities are traded worldwide and are popular among traders because they offer a high degree of liquidity. When you trade commodity CFDs, you are speculating on the price movement of the underlying commodity. If you think the cost of gold will rise, you will buy an extended position. If you think the price of gold will fall, you will sell a short position.
ETFs
Exchange-traded funds, or ETFs, are investment funds that track an underlying asset, such as a commodity, basket of shares, or index. ETFs are traded on exchanges and are bought and sold in the same way as shares. ETFs are popular among traders because they offer diversification and can be used to hedge against other positions. When you trade an ETF CFD, you are speculating on the underlying asset’s price movement.
Bonds
Debt security pays periodic interest payments and matures at a specific date. Governments and companies issue bonds to raise capital. Bond CFDs allow you to speculate on the price movement of a bond. When you buy a bond CFD, you are effectively buying the underlying bond. If the bond price rises, you will make a profit; if it falls, you will incur a loss.
The different types of markets for CFDs
There are two types of markets for CFDs: over-the-counter (OTC) and exchange-traded.
OTC CFD market
The OTC CFD market is decentralised, where trading occurs between two counterparties without needing a central exchange. OTC CFD brokers act as market makers and quote prices at which they are willing to buy and sell CFDs. When you trade on the OTC market, you are speculating against the broker, not other traders. OTC CFD brokers make their money from the spread, which is the difference between a CFDs buy and sell price. OTC CFD brokers also charge commission on trades.
Exchange-traded CFD market
The exchange-traded CFD market is a centralised market where trading takes place on an exchange between traders. When you trade on an exchange, you are speculating against other traders, not the exchange. Exchange-traded CFD brokers make their money from the commission, which is a small fee for each trade.
Get started trading CFDs
If you would like to get started trading CFDs, you simply have to find a reputable and reliable broker that is licensed to operate in your territory. Saxo FX broker UAE is favoured by local traders and can ensure your funds are safe and secure. They also provide a range of CFDs across a variety of markets, which can be traded at your convenience.