Although financial markets are no longer paying attention to the COVID-19 pandemic as they did a year ago, new events and developments continue to influence asset valuations. As of lately, the US inflation figures had turned out hotter than expected, yet the industry did not consider this as a risk factor, pushing tech stocks and bond prices up, at the same time.
Since this is not a pre-set path for the markets and things can change on a month-by-month basis, retail traders can take advantage of Contracts for Difference, in order to take advantage of short-term price movements.
Contracts for Difference, or CFDs, are financial derivatives based on different popular assets (currency pairs, stocks, indices, commodities, bonds, etc.) enabling the buyer or the sellers to profit from rising or falling price movements.
Using CFD trading apps and optimized software, large brokerage houses facilitate access to the financial markets from anywhere in the world, as long as users have compatible devices and a stable internet connection. CFDs had been among the main asset types used for the democratization of online trading and even now in 2021, they continue to be used by millions of traders around the world.
Why retail traders use CFDs?
CFDs are financial instruments that enable the use of leverage. Traders are able to start trading with limited capital and enhance their market exposure via margin. However, as most traders will learn on their own skin, leverage must be dealt with strict risk management rules, in order to ensure small account drawdowns when losing periods occur.
At the same time, CFDs are instruments carrying low trading costs. Spreads and overnight swaps (applying only if the trader keeps a trade open after midnight) are generally the main costs. These derivatives are ideal when trading short-term, in an environment where there is volatility and price directional bias.
Pros/Cons of using CFDs
Among the top benefits of using CFDs, affordability, coverage for a broad range of markets, tight trading costs, and the ability to work with regulated brokerages, should be highlighted. Nowadays, retail traders can take advantage of attractive trading conditions, without having to allocate a lot of capital, showing the industry had shifted towards the average Joe on the street.
On the flip side, trading CFDs carries risk, as with any other financial investment. Especially when trading volatile assets like Bitcoin, traders should be aware that prices can behave differently than expected, leading to losses, in the absence of a clear trading plan and risk management rules. Also, CFDs are not ideal when trading for a longer period. That happens because overnight swaps can add up and reduce profitability overall.
The bottom line
Current conditions in the financial markets continue to foster the use of Contracts for Difference. Popular brokerage houses had constantly upgraded their trading offers and now customers have access to optimized trading software, multiple trading benefits, and educational support. Beginners willing to do the hard work and learn and accumulate valuable knowledge and see how professionals are using CFDs.