Why you want to trade with CFD
There are many advantages to trade with CFD’s rather than traditional investment products in Nigeria but for the purpose of not creating a very long article, we have focused on five main reasons below.
When you trade on CFD broker platforms you get access to leverage trading so that your own capital you use in trades works harder than if you invest in other financial service products. Leverage means that you as trader can increase the potential return of trade without the need to tie up your capital and therefore be able to make more trades. The amount of leverage you can get for a trade depends on the underlying assets you trade (i.e. stocks, or oil or bitcoin for example).
Let’s explain how this works in practice. Say that you are interested in speculating in the price of bitcoin and you think that the price of bitcoin will go up. You have 300 USD to invest and you have signed up for CFD account, perhaps at AvaTrade that has local presence in Nigeria. When you place your trade to buy Bitcoin (buy since you think that the price will go up) you can use the brokers leverage to place a trade for a higher amount then your own capital, in this case say 10 times higher although this might differ from broker to broker. Your leverage is now 1:10 or 10 times the amount of your own capital. This means that the trade you make has the size of 3000 USD even though you’re on capital used is only 300 USD.
The price of Bitcoin goes up with 7% in a matter of a three hours and the value of your position is now 3210 USD or 210 USD more than when you entered the trade. If you decide to close the trade you would have made a 210 USD profit that would be put in to your trading account when you close the trade. Just to state it differently, you have made 210 USD profit from only 300 USD of your own capital. If you didn’t use a CFD in the same trading conditions, you would have only made 21 USD (300 USD x 7%) or ten times less.
You are automatically given your leverage when you open your CFD trading account and all registered traders can use this function. It is worth noting that the CFD broker will charge you a small over-night interest on the leverage sum if you keep your trade open for longer than 24 hours. The leverage will also amplify losses in your trading account, so never use more than what you can afford.
2. No fixed trading fees
CFD brokers will not charge you a fixed free for the trades you make in your account and will not charge a variable fee on the profit or losses of your trades either. CFD brokers make their money on the spread instead, this is the difference between the Buy and Sell price of a CFD.
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3. Trade on all world markets and all types of assets from one account
Trading with a CFD broker means that you will have access to almost all types of trading instruments (or assets in other words) from one trading account and in many cases you can trade 24/7 without the exchanges being open. From one account you have access to stocks from all major and minor exchanges around the world, commodities such as oil, gold, silver, sugar, cacao, coffee and many more, cryptocurrencies like Bitcoin, exchange trades funds (ETF’s), index trading and government bonds – all from one easy-to-use trading account.
4. Going short
When you trade with a CFD to have the possibility to go short on trades which means that you can make profitable trades even if the price of an instrument goes down in value. This feature is great for when you think a world event or a negative happing will cause the price of the asset to go down in price. When you place a Sell order using a CFD you are going short on that specific assets and will make a profit if the price goes under the price you entered in to the trade with. In traditional trading, such as buying stocks or funds from a bank, you will not have the opportunity to go short since you are buying the physical asset.
5. Speculate in price movements without having to own the asset
If you are only interested in speculating on the price movement of an asset and have no desire to actually own the asset, then CFD are right for you. A CFD is only tied to the price of the underlying assets (say coffee for example) without the need to own and store it. You could of course speculate on the price movement on coffee without a CFD but then a truck of 2 tons of coffee would show up at your home and you would need to store it, not to mention transport it to the buyer when you sell it. Not very practical is it?
We hope that this article on what CFD trading means has given you the information you need. The next natural step is to use the free educational material and free demo account that our recommended CFD broker provides: