In Globals Markets, Contracts For Difference Might Be Making A Difference In 2022

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With professional analysts and funds predicting a possibly turbulent equities market in 2022, some investors are scrambling to find other avenues for opportunities. 

Commodities, particularly gold, seem like an interesting candidate for many. The foreign exchange market, futures, and trademark value stocks like Microsoft Corp. MSFT and Apple Inc. AAPL arguably serve as other outlets.

However, for traders outside the United States, contracts for difference (CFD) are reportedly offering an interesting outlet into potential value opportunities. With brokers like FOREX.com providing access to the CFD market, this potential avenue is just a click away.

But first, what is a CFD, and what benefits does it grant investors? 

What’s a CFD? 

A contract for difference is an agreement between an investor and provider to exchange the difference in the value of a financial product between the time it opens and closes. 

Much like options traders who transact before the expiration of the contract, there is no delivery of physical goods or securities with CFD trades. Instead, traders operate on a cash-settlement basis in which the difference between the past and current price of the contract is distributed. 

Similar to how traders use options to make predictions on the price of underlying securities, traders use CFDs to make bets on the price movements of securities and derivatives. 

Trades who expect an upward movement in price will buy CFDs, and traders who expect the opposite will sell them. 

CFDs are often used to trade exchange-traded funds like the SPDR S&P 500 (SPY) and to speculate on the moves in commodity futures contracts such as crude oil, corn, and metals. 

Importantly, CFDs trade over the counter (OTC) through a network of brokers and are not accessible through typical mediums like the New York Stock Exchange or the Nasdaq Stock Exchange. 

What’s the Deal? 

For one, because there’s no exchange in physical securities, CFD traders are not curtailed with the risk of owning a security that doesn’t belong to them or the costs associated with borrowing, as is the case for short-sellers. 

CFDs are traded on margin, meaning they typically provide traders with higher leverage than typical securities and derivatives. For example, a purchase of 100 shares of the SPY at $300 would cost a trader $30,000, but the same purchase of a CFD with a broker requiring 20% down would only cost $6,000 ($30,000 x 0.2). Please be aware that increasing leverage also increases risk.  

CFDs can create this leverage opportunity while also granting traders cash dividends — a characteristic that typically belongs exclusively to security holders. 

Finally, because CFDs can be bought or sold, they allow traders to go long or short on commodities and securities at any time. 

While there are important risks to CFDs — margin calls and loose regulations are two notable ones — they provide an interesting avenue for some traders to consider.

Brokers like FOREX.com provide traders direct access to CFDs, as well as a host of other quality features. In addition to its title as the top broker in the U.S. for forex trading, FOREX.com’s comprehensive education program, performance analytics software, and access to CFD markets exemplify its commitment to be more than just a forex hub. 

“Our mission is to give you every trading advantage possible,” according to the company website. “Whether it’s on your browser, desktop, or mobile, our platforms are packed with features to help you make your mark on the markets.”

CFDs are not tradable within the United States.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.