The current market situation has forced many investors into new strategies, due to the high degree of volatility. One option that has been attracting a lot of attention is called contracts for difference (CFD).
So, what does this involve, and why is it particularly useful in times of volatility?
Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
The basics of CFDs
This type of investment involves the trader predicting the future change of value in an asset such as shares, currency, or commodities. They then enter into a contract that can see them earn a profit based on whether the value goes up or down.
Crucially, the investor doesn’t have to buy the underlying asset to make a profit from it. This makes it easier for them to aim for big profits by using leverage, rather than putting a lot of money into it.
It is a fast-moving type of investment in which it is important to keep a close eye on the market and make a move at the right time. Anyone can take out this kind of investment, but it mostly suits a relatively sophisticated investor who understands the markets and won’t over-stretch themselves.
Using a reputable, regulated broker for these investments is highly recommended. The most important aspects of any CFD broker include the usability of the platform, the fees charged, and the support available.
Why do they suit a volatile market?
The best gains on CFDs are obtained when the price of underlying assets undergo a big swing. This means that the current situation is ideal, as we have seen some dramatic price movements, both up and down, in just about every financial market in 2020.
If we look at the stock market as an example of this, many shares have fallen heavily so far this year. Yet, Morgan Stanley recently predicted a V-shaped recovery that could see much of the losses clawed back relatively quickly.
A smart CFD investor could have gained from the fall and also from the imminent rise in stock prices. By using leverage, they can earn more than would be possible by simply buying the stock. It is also worth bearing in mind that the lack of stability in the stock market makes buying shares less attractive right now.
The same theory applies to other markets. So far this year, we have seen the price of oil collapse and then begin a recovery, with further price rises expected in the near future. Something similar has also happened in the currency markets, as the US Dollar gained massively against other currencies, but is now expected to fall back.
A look ahead
As long as the world’s financial markets remain tumultuous, CFDs will continue to be an approach that attracts more and more attention. Everyone is looking for a solid strategy that suits the current economic climate, and this is arguably the most attractive method for the turbulent times we live in.