This website is primarily about binary options but I still want to say a few words about CFD certificates. The reason I want to talk about CFD certificates is that many traders chose to trade binary options together to create hedged trades that allows them to make a lot of money with limited downside and risk.
The most common way to achieve this is to buy a CFD in a stock (or currency, commodity, index) that you think is going to go up in value. When you purchased the CFD you place a stop loss that automatically closes you CFD position if the stock goes down by a certain amount. You then buy a binary option that matures in the money if the value of the stock goes down. You invest enough in the binary option to cover the loss you would get in the CFD. The end result is that you make money if the stock goes up as expected. If it goes down then the binary option will cover your loss. The downside of doing this is that your potential profits will be reduced by the cost of binary options.
This type of hedge is not fool proof and might fail in a volatile market.
What is a CFD?
A CFD (Certificate for difference) is a financial instrument that allows you to make leveraged trades on the stock, FX and commodity market. You gain a number of benefits from buying the CFD instead of the underlying asset. Some of the most important benefits are:
- You can trade with large leverage. Usually up to x250 on the stock market and x500 on the FX market. This allows you to make large profits on small market movements. A x250 CFD allows you to make a 250% return if the underlying asset increases 1% in value. Leverage allows you to make large profits with small investments.
- You do not have to worry about liquidity. You can always close your CFD position at the current market value regardless of whether there are buyers in the market or not.
CFD:s do however also bring some drawbacks with them compared to investing directly in the underlying asset. Some of the most important drawbacks are:
- CFD trading is very high risk. The leverage increases both your profits and your losses. You risk losing more money than you have invested. If you are unlucky you can lose more money then you have in your account. If this happens then you need to deposit more money to cancel your debt to the broker.
- You have to pay a fee to keep CFD certificates over night. It can easily become expensive if you want to hold them for a long time. CFD:s are developed for day trading and other short term trading.
- You never own the underlying asset and do not gain any voting rights or any other rights.
CFD certificates can be very powerful tools that can earn you a lot of money if you know how to use them in a responsible way. Never trade with CFD certificates if you do not understand how they work.
How to trade CFD:s
If you want to trade CFD:S you will need to get an account with a CFD broker. There are a number of different reputable companies to choose from as well as a number of smaller brokers. I recommend that you chose to trade with one of the larger well established CFD brokers on the market. Some of the smaller ones can be very good but there are also some not so good ones on the market. By choosing a well established broker you avoid the risk of choosing a bad broker. If you want to register with a smaller less established broker then it is very important that you take the time necessary to research that broke well before you register.
Different brokers tend to specialize in different types of assets. Some specialize in stock based CFD:s while other specialize in FX based CFD:s. Many brokers offer CFD:s based on several different types of financial instruments but it is common that the CFD:s offered skews towards a certain asset class. Make sure that you choose a broker that offer a wide selection of CFD:s based on the assets you want to trade with.
Once you have an account you need to deposit money to it.
It is very easy to buy and sell CFD:s once you have your account with money in it. The process is very similar to buying an binary options. Most brokers have well developed platforms that are easy to use even if you never traded online before.
Fees and costs
CFD brokers earn their money in two different ways. Through the spread and through overnight fees. Especially overnight fees can be very profitable for the brokers as it give them a high return on their investment despite the very low risk. You as the trader face the risk if a trade goes wrong. They do not. The overnight fee is usually based on the current interest rate. The overnight fee is usually a couple of percentage points above the current interest rates. The fee you need to pay to hold your CFD is usually very small but adds up to large profits for the broker.
The spread is also profitable for the broker. How large the spread is can vary slightly between different brokers. You should always chose a broker with a low spread.
CFD brokers does not earn money when you lose money. This is a common misconception. It is the brokers best interest that you earn money. The more you earn the more they earn.
How much money can I earn?
There is no limit to how much money you can earn. You can earn an unlimited amount of money on every transaction.
How much money can I lose?
You can lose a lot of money when you trade with CFD:s. You can lose more than you invested and more than you got on your account. Their is a limit for how much you can lose on each transaction. The value of the underlying asset can never sink below zero. You can therefore calculate the maximal loss by multiplying the invested amount with the leverage. If you invest 100 in a X250 CFD then you can lose 25 000.
Are CFD:s a scam?
No. CFD:s are not a scam. They are high risk high reward financial instruments. The brokers want you to make money. They make more money if you earn a lot of money and start trading more frequently and for bigger amounts. They do not make any money when you lose money. They therefore strive to help all their clients to make money.