CFD trading has become increasingly popular in recent weeks, and for the right reasons. It gives you the freedom to trade unconventional financial assets, generate profits, and expand your trading portfolio. 

Here’s a closer look at how contracts for differences (CFDs) work and the different CFD types you can trade:

How Do Contract for Differences (CFDs) Work?

CFDs are derivatives. They allow you to speculate on the direction of the market, finding opportunities in both bull and bear markets. Consider features like tighter spreads and low commissions when looking for the best CFD trading platform. 

Look at it this way: When you buy shares in a company, you own a piece of that company. This ownership comes with certain benefits, such as dividends and long-term returns. This isn’t the case with CFDs. 

You don’t buy an asset, you speculate on its price. You enter into a contract with your broker and agree to exchange the difference based on whether the price goes up or down. 

You can also use leverage to control a much larger position with a smaller amount. Leverage is expressed in a ratio and depends on your broker. For instance, if you’re trading a CFD worth $10,000, the broker might only require you to deposit $1,000. Here, the leverage ratio is 10:1. 

Types of CFDs

One of the best features of CFDs is versatility. Here are six types of CFDs you can trade:

Forex

Forex can be traded as a type of CFD. It involves buying one currency for another. You can speculate on the price movements of major, minor, and exotic currency pairs. Major currency pairs include:

• EUR/USD
• AUD/USD
• GBP/USD

Minor currency pairs include:

• EUR/GBP
• EUR/JPY
• AUD/JPY

Examples of exotic currency pairs include:

• USD/ZAR
• USD/TRY

The foreign exchange market is the world’s largest and most liquid financial market. It is open 24/5, allowing financial institutions, traders, and hedge funds to open and close positions by going long or short. 

Indices

A CFD trader can also invest in indices. These are a measurement of the price performance of a group of stocks or bonds. Popular indexes include the S&P 500, FTSE 100 Index, and Nikkei 225. 

Cryptocurrencies

This allows you to speculate on the price movements of cryptocurrencies, such as Bitcoin and Ethereum. Cryptocurrencies are gaining immense popularity as they provide a hedge against inflation and allow traders to boost profits. 

Commodities

CFDs are available for the most popular commodities, including oil, copper, and even natural gas. 

Shares

You can also invest in CFDs based on company shares. Examples include Amazon, Tesla, Meta, and Apple. The trading time frame for CFD shares differs. For instance, if you wish to speculate on the price movement of Tesla shares, you would have to wait for the U.S market to open. 

Precious Metals

Precious metals like gold and silver have always been profitable investment vehicles. Now, traders can invest in them through CFD trading.