On the stock market, some investors may choose derivatives in order to seek greater performance. This is the case of Contract For Difference (CFD).
When we invest in the stock market, we choose securities for their performance potential. This may be the income paid in the form of dividends or the potential for capital appreciation in the short and medium term. The most experienced investors, such as traders, can use supports offering them the possibility of multiplying their gains. CFDs (Contract For Difference) are a solution in their range of possibilities. These are derivative products that make it possible to bet on the rise or fall of a financial security called the underlying. The latter can be a share, a stock market index, a fund, etc.).
With CFD trading, the goal is to make money by touching the difference between the price of the underlying between buying and reselling the CFD. This difference is multiplied by a factor called leverage.
Good to know :
CFD trading is intended for people who carry out frequent buy-sell transactions (intraday, for example).
The benefits of CFD trading
The main interest of CFD trading is to take advantage of a multiplier coefficient in order to increase your earnings by two or five. Some trading platforms even offer much more (when others limit this leverage) by providing stop-losses. These are then called limited risk CFDs. The choice of broker is therefore essential before investing (discover our comparator on the best trading platforms).
CFDs are also interesting because they allow you to invest (up or down) in many financial assets such as stocks, stock indices, commodities, currencies and cryptocurrencies.
In addition, CFDs do not have an expiry date, thus allowing them to be kept for an indefinite period. Unlike traditional shares, CFDs can be traded at any time and outside the opening hours of the financial markets.
The risks associated with CFD trading
Leverage is the main risk associated with CFD trading. Indeed, it multiplies the risk of loss. It is therefore necessary to be vigilant with margin calls. In the event of a potential loss, your broker may liquidate your position out of the available funds in your account if the available funds are not sufficient. The consequence will then be a definitive loss which cannot be compensated by a market turnaround more favorable to your initial investment.
Moreover, since CFDs are not securities listed on official markets, their marketing is not based on strict regulations. The rules regarding their operation or the fees charged therefore depend on the trading platform.
To protect savers, the European Securities and Markets Authority (ESMA), the European financial policeman, has taken several measures to limit losses, in particular by providing for measures aimed at reducing the leverage effect or by limiting the risk to all deposits.