CFD trading provides you with the opportunity to speculate on a certain price movement of an entire range of financial markets including shares, currencies, commodities, bonds, and indices, regardless of whether prices are on the upper side or going down. In simple words, CFD trading is the purchasing and selling of CFDs without having to actually own the underlying assets. CFDs are derivate or leveraged products that accompany with minimal margins and reduced broker fees as compared to stock market trading.
When trading a CFD, you agree to exchange the difference in the price of a particular asset from the time at which the contract is initiated to when it’s closed. Likewise, CFD trading enables you to speculate on price movement in both directions, whether you gain a return or face the loss. It is generally traded the same way you trade shares and stocks with the help of a broker who quotes prices by using current price of the underlying assets in a CFD market.
Like any other financial products, CFDs are traded in CFD markets that are increasingly being emerged in many countries across the world. A CFD market presents CFDs as an OTC or “Over the Counter” derivative, offering traders and investors lots of additional advantages. One of the biggest advantages of such type of trading is that it provides you with a better and more stable strategy as you can work with both short and long positions. Also, a CFD market allows you to close and reopen your position as and when you want.
- Short Position – Also known as short selling, this type of position is when you feel the CFD market is about to decline or become bearish market and you will then open your position. In order to do so, you will need to finance the cost and then close (sell) the position at a higher market price. A CFD market is normally termed as the Bear marker or bearish market when it starts demonstrating a decline over a certain period of time.
- Long Position – This type of position is also called “going long” which is when you speculate that the CFD market is going up or becoming bullish market and subsequently open your position and then close it at a time when it is to be increased for a profit. A CFD market is typically termed as “Bull Market” or Bullish Market” when it shows a significant increase over a certain period of time.
When comparing the CFD market types, it is significantly much better and easier to make money in the bullish market though you can also trade successfully in the bearish CFD market as long as you open short position. If you have done your homework, followed trends, and evaluated necessary data and graphs, you should be able to speculate correctly when the CFD market will rise and fall. This can also be handy in creating a strong CFD trading strategy using both the short and long section of the CFD market so you can gain good returns on your investments.
Models of a CFD Market
A CFD market is generally organized with one of three different models, such as Agency Broker, Market Maker, and Direct Market Access (DMA) model.
Market Maker Model
The Market Maker model enables CFD providers to take each order into their book and maintain decisions with regard to how the trade is offset by means of options, futures, and warranties or directly via the underlying market. Under this type of CFD market, providers are given the opportunity to promote the offerings without having to pay any type of commissions. It lets the prices streamed based on the providers’ individual pricing model which is primarily meant to integrate the earnings into the bid-ask spread. The traditional Market maker model often accompanies with wide spreads in stormy marketplaces as well as the probability of re-quotes
Direct Market Access Model
DMA or Direct Market Access model is the most transparent CFD market of the three. It allows the CFD provider to hedge the CFD order directly in the basic physical market and the CFD to execute at the original price of the hedge. This not only helps improve the pricing transparency but also compensates the CFD provider through a commission rather than a mark-up.
The DMA model of a CFD market provides IB customers with the opportunity to add more quotes to the exchange book like they would do in stock trading market. Seeing that an IB matches each CFD order directly with a hedge-order, this will enable a non-marketable CFD order to make a matching non-marketable order for the primary stock or share on the exchange. With the DMA model, clients are provided with the level 2 book so that they can view their orders easily. Similarly, this type of CFD market model uses IB’s SmartRouting technology that can equally benefit both marketable and non-marketable as it routes the order to one of many underlying markets to ensure the best possible execution.
The Agency Broker Model
This type of CFD market model is very much resembled to the Direct Market Access model since it also allows the orders to hedge immediately through the underlying physical market. With the Agency Broker Model, however, partakers won’t be able to view their orders limit on the exchange. This is because such orders can be held by the CFD provider and moved across only when they turn out to be marketable.
There are three main types of CFD market models as discussed above. Each type comes with its individual pros and cons, and each CFD trader makes profits in different way. It is, however, important to remember that a strong trading strategy is always the key to successfully go through ups and downs of CFD markets. Make sure you are aware of risk management strategy and add it to your trading plan, remembering that trading CFDs not only can lead to huge returns but also can lead to shocking loss of capital.