Online trading is on the rise. Today, everyone can earn money remotely. Forget about stuffy offices: all you need is an Internet-connected device. Thanks to global brokerage firms, residents of Nigeria have access to a wide range of instruments – from currencies to derivatives. CFDs are virtual agreements that are bought and sold according to fundamental market logic.
Contracts for Difference are convenient tools for traders with the knowledge of different markets. These derivatives may be linked to commodities, stocks, market indices, or cryptocurrencies. CFD holders do not own the underlying assets. They only speculate on price dynamics, which adds to the convenience.
A New Generation of Instruments
CFDs are an upgrade to the standard market arsenal. To understand how they work, think about the physical stock exchange like NYSE. This is a space where participants buy and sell stock issued by major corporations. For businesses, this is a way to attract investor capital.
For shareholders, the stock purchase is an earning method. They gain dividends based on corporate performance and can sell their securities at a higher price. In this scenario, every share bought brings ownership of a fraction of the company. As stocks circulate on physical exchanges, they are less accessible than purely virtual instruments. One such alternative is the CFD.
Clients of brokerages may purchase CFDs through trading apps and platforms. These instruments have no physical dimension: they only exist in global computer systems. Potential profit, however, is very real.
Humans are used to operating remotely. Today, we do many things on go, from shopping to education. The global economy is increasingly cashless, and mobile devices are ubiquitous. In this context, the existence of a purely virtual derivative looks perfectly logical.
Basics of CFDs
A CFD is your agreement with a broker like FXTM. Its subject is the price. The value of this instrument moves in line with the value of the underlying asset. For instance, a trader of CFDs on crude oil monitors the price for the related commodity. Whatever the asset, profit or loss relies on your ability to foresee trends. Discover more about the CFD meaning and opportunities in Nigeria.
CFDs have a number of advantages over other trading instruments. First, it is the absence of physical assets. Even if your instrument depends on the price of WTI, no actual barrels will change hands. Secondly, brokers offer leverage just like in the currency market. This means you may trade larger volumes than your deposit allows. The intermediary provides a portion of funds to boost your purchasing power. Now, let’s have a closer look at specific types of CFDs.
Tied to Commodities
Commodities are special types of products that are bought and sold internationally. Their price is determined by market forces, rather than individual producers. For instance, all oil companies that produce a benchmark (e.g., WTI or Brent), sell their output for the same price. Other commodities include precious metals, wheat, etc. A CFD trader will aim to predict changes in the price for their underlying commodity.
Any type of trend can bring profit. This is true for all CFDs. For instance, if you expect a rise, you may purchase more lots now and sell them when the price grows. Falls are also lucrative: traders sell their CFDs before they lose value. After the drop, they can buy more lots for less. Every instrument goes through ups and downs – this is the basic logic of the market.
Tied to Market Indices
A market index is a collective indicator. It reflects the performance of a cluster of companies. CFDs connected to indices are diversified by nature. As their value depends on a group, rather than a single entity, it is more balanced and predictable.
Consider CFDs on FTSE 100. The index is tied to 100 UK companies. These are giants like Unilever, Lloyds Banking Group, and Royal Dutch Shell. As a trader, you do not have to think about the results of each company on the list. This reduces the overall risk. Other popular CFDs are connected to ‘growth stocks’ of tech giants and blue chips.
Tied to Cryptocurrencies
These instruments are tied to the values of digital coins. Aside from Bitcoin, you may trade CFDs on Ethereum, Litecoin, and Ripple. All coins are always valued against the US dollar. This market is known for its volatility, so profits may be impressive.
Word of Caution
CFDs bring multiple advantages that cannot be denied. They are accessible instruments bought and sold online, without a physical exchange. However, traders need to be cautious when using leverage. Although it raises your profit ceiling, risks also grow. It is important to gain experience before trading on margin. Alternatively, use copy trading and delegate decision-making to a professional.