Most traders engage in contracts for difference (CFDs) daily due to the significant benefits it offers. If you already have a basic understanding of what CFD trading is but are still on the fence about starting, this guide will walk you through its major advantages and how you can begin your CFD trading journey.

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What is CFD trading?

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CFD trading (Contract for Difference) allows you to speculate on the price movements of various assets, like stocks, commodities, or even Derived Indices, without actually owning the underlying asset. Instead, you enter a contract with a broker to exchange the difference in the asset’s price from when you open the trade to when you close it. It’s a way to potentially profit from both rising and falling markets, but it also comes with risks, as you could lose more than your initial investment.

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Benefits of CFD trading

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Access to a wide selection of markets

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One of the main attractions of CFD trading is the ability to access multiple global markets from a single platform. CFDs allow you to trade a wide range of assets, like forex, stocks, indices, ETFs, commodities, cryptocurrencies and derived indices,  giving you the flexibility to diversify your portfolio. 

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Diversification is crucial for managing risk, as spreading your investments across various assets can help minimise potential losses.

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At Deriv, you can access forex, stocks, indices, ETFs and commodities during standard market hours, while cryptocurrencies and derived indices (synthetic indices) are available 24/7, offering you continuous trading opportunities. This broad choice of assets enables you to choose markets that align with your trading goals.

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Profit from both rising and falling markets

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A unique advantage of CFD trading is the ability to make profits from both rising (going long) and falling (going short) markets. With CFDs, you’re speculating on the price movement of an underlying asset rather than owning it. If you believe an asset’s price will rise, you can place a buy order (long position). If you predict that the price will fall, you can open a sell order (short position).

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CFD trading example

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For example, if a company misses its earnings expectations and you anticipate a decline in its stock price, you can open a short CFD position on the stock. If the price falls as expected, you’ll profit from the decline. This flexibility is a key reason why many traders choose CFDs, as they offer the potential to profit regardless of market direction.

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Cost-effective capital utilisation

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CFDs are often traded on margin, meaning you only need to deposit a small percentage of the trade’s total value. This leverage allows you to control a larger position with a smaller amount of capital, enabling you to allocate your budget to multiple trades. Additionally, since you don’t own the underlying asset, you avoid the costs associated with asset ownership, such as taxes and fees.

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There are also risk-management tools like the stop loss feature, which protects you from losing too much of your capital if a trade goes against your prediction.

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Easy start for beginners

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While professional traders often use advanced CFD trading strategies, beginners can also benefit from the simplicity of CFD trading. A great way to start is by following news events. Financial markets are highly influenced by political and economic events, and big announcements usually lead to significant price fluctuations. 

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If you’re not comfortable with news trading, Deriv offers derived indices, which are assets that mimic real-world market movements but are unaffected by external factors like world events. This makes derived indices an excellent option for those looking to gain experience in a more controlled environment.

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5 popular markets to trade CFDs

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With so many options to choose from, how do you know which ones are the best for CFD trading? Here’s a rundown of the most popular CFD trading markets, along with some things to remember when choosing where to trade.

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Forex

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Forex is the largest financial market globally, with a high degree of liquidity and volatility, making it a popular market for CFD trading. When trading forex CFDs, you’re speculating on the price movement of currency pairs rather than buying or selling actual currencies. This type of trading is ideal for beginners due to the liquidity and constant price action in the forex market. It offers numerous opportunities for traders to capitalise on short-term price fluctuations.

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Commodities

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Commodities such as oil, gold, and natural gas are some of the most popular assets traded in the CFD market. These assets tend to be influenced by macroeconomic factors like inflation, supply and demand, and geopolitical events. For traders looking to hedge against inflation or diversify their portfolios, commodities CFDs are an attractive option. However, understanding the underlying market conditions, such as the impact of OPEC decisions on oil prices, is critical for successful commodities trading.

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Cryptocurrencies

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Cryptocurrencies like Bitcoin and Ethereum have emerged as popular assets for CFD trading due to their volatility. CFD trading allows you to speculate on the price movements of these digital assets without owning them directly, providing a simpler and more flexible way to trade in the crypto market. However, since cryptocurrency prices can be highly unpredictable, traders are advised to use caution and proper risk management when entering this market.

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Stocks

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CFDs on stocks offer traders the opportunity to speculate on the price movements of individual company shares. You don’t own the underlying stock; instead, you’re trading based on whether you believe the stock price will go up or down. Stock CFDs are appealing to both short-term traders and long-term investors, as they provide a flexible way to engage with the equity markets without requiring large capital outlays.

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Stock Indices

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Stock indices are collections of multiple stocks that represent a particular market or industry. When trading index CFDs, you’re speculating on the performance of an entire market segment rather than individual stocks. This makes indices an excellent choice for traders looking to gain broad exposure to market trends without the complexity of managing multiple positions.

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Start trading CFDs today!

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Whatever market you choose to start, you can practise by creating a CFD trading demo account before trading with real money. Create a free demo trading account with Deriv today, and try CFD trading on Deriv MT5, Deriv cTrader or Deriv X.