CFD trading has become popular because of the advantages it offers over the traditional form of trading. It allows traders to trade in the short term with a small capital using leverage. Also, it offers traders a variety of assets ranging from stocks to currencies.
The following are the primary types of CFD assets that can be traded:
Stocks or equity are financial instruments that reflect part ownership of a company. The term “shares” is widely used to refer to stock units. Typically, the instrument is purchased and traded on stock exchanges. The price changes of stock are the basis for trading equities as CFDs. It means you don’t have to hold the underlying shares if you trade stocks as CFDs. To trade stocks as CFDs, all you need to do is establish an account with a broker who offers stock CFDs as a trading option.
An index is a measure of the performance basket of securities. It can be the Standard & Poor’s 500 or the Dow Jones Industrial Average. Also, it can be a specialized market for a specific industry.
Compared to stocks, index CFDs have lesser risk. Index CFDs are leverage so traders can open a trade with a small capital.
Commodities are goods that are used in business that may be exchanged for other products. Usually, investors diversify their portfolios into stocks and commodities like energy, livestock, metal, and livestock.
The underlying price movement of the commodity is the basis for commodity CFD trading. A good example is when a trader opens a gold CFD. The trader doesn’t own the actual gold, the contract is based on the change of the gold price.
Interest rates and calculated based on the value of the contract and are usually done daily.
The rate is usually around 2-3% higher or lower than the overnight cash rate of the Reserve Bank.
Exchange-Traded Funds (ETFs)
ETF consists of a collection of securities. This type of asset has a lot of similarities to a mutual fund. It is traded like a stock on exchanges. CFDs can be used to trade ETFs. You don’t have to own the ETFs. Similar to other CFDs. It is just based on the changes in the price of the underlying asset. It simply means that you gain from the ETF’s price differential without really owning the ETF asset.
Bonds are fixed income that usually symbolizes a lender’s loan to a borrower. Governments and companies all use bonds to fund projects and operations. The borrower is responsible for paying the bondholder principle and interest.
The CFD trader does not collect the yield earned from the bond because the trader is not the one lending the money. It is just a contract based on the fluctuation of prices of bonds.