Contracts for difference, generally known as CFDs, have been available for decades, but they have enjoyed a surge of interest over the last couple of years, with the financial instruments getting ever easier to trade and the volatility caused by Covid-19 offering the chance of greater rewards.
What are CFDs?
In traditional share trading, you are directly buying or selling a tiny portion of a company, whether that is a large tech firm like Apple or Amazon or an exciting start-up like Wise or Coinbase. Meanwhile, with a CFD you are speculating on the changing price of an asset without ever actually owning any portion of the asset itself.
Instead of trading the asset itself, with CFDs you are trading on margins and such trades require less capital investment than buying traditional shares. Moreover, CFDs are available to trade on a huge range of different markets from the stock market to commodities and currencies, and the instruments have no settlement times, so profits can be realised instantly. And the apps and platforms easier to use than ever – check an eToro, Trading212, or Libertex review to find some of the most popular options – it is easy to see why CFDs have become so popular.
However, the downside of margin trading is that it is not just any wins that are magnified, but also any losses. Unlike traditional share trades, it is possible to lose more capital than the original investment with a leveraged CFD position – something which needs to be understood by anyone looking to start investing.
Why is CFD trading currently surging?
Covid-19 has had a dramatic impact on every aspect of our lives over the last two years, and that has caused significant volatility in the financial markets. CFDs amplify risk, so when the market is in turmoil the opportunity for bigger rewards and losses increases.
Moreover, with millions of people bored and stuck at home during the lockdowns of the past two years, CFD trading has been taken up by some as a new interest. However, analysts warn that people should not treat the markets as a game and should always research their investments carefully so as not to get caught out by market fluctuations – especially CFD trading, which carries more risk than most.