Advantages of Trading CFDs Rather Than the Spot Market

Many traders don’t fully understand the difference between CFDs and the spot market. In this article, we’ll explain the difference between these two types of market mechanisms, and explain why we think it is better for Olymp Trade clients to trade in CFDs.

There are a number of trading methods available for Forex trading, also known as foreign exchange or Fx. These include spread betting, the spot market, options, futures, CFDs and more. Let’s take a look at two of the most popular methods —Contracts for Difference (CFD) and the Spot Market. Although both of these methods have negatives and positives depending on your trading goals, most clients at Olymp Trade’s prefer to trade CFDs rather than the spot market.

Advantages of Trading CFDs Rather Than the Spot Market
Advantages of Trading CFDs Rather Than the Spot Market

To understand the difference, let’s look at the “spot market” and explain how it operates.

The Spot Market

In a traditional market, a buyer and seller agree on a price and exchanging the two assets of the trade is done immediately, or “on the spot”, hence the name the spot market. Despite the name however, the exchange of assets is not done instantaneously for most assets as arrangements need to be made for the assets to be delivered.

If you for example want to buy 150 shares of a stock at a price of $95 USD each, you need to first find a seller that is willing to sell those shares at the price you’re willing to pay. Although you pay immediately, the seller needs to get the stock certificates delivered to you and these may not be available at that moment.

In cases like this, the benchmark is T+2, which simply means the transaction will be finalized on the transaction date plus 2 business days. As the price of the trade has been agreed upon, it will not change despite any change in value of the stock in the time it takes for the certificates to be delivered.

The same happens if you for example want to exchange two currencies on the Forex market. You may want to buy goods from the U.S., and need Dollars to do so. You therefore go to the exchange and buy USD with Euros at the spot price. You will immediately receive your USD, enabling you to buy your products.

This transaction will be conducted immediately on many exchanges, but if larger markets are used, the 2 day (T+2) transaction timeframe may apply before you actually get your USD.

Delivery times are often longer for commodities such as Gold and oil, and futures contracts are often used to facilitate the exchange at a specific point in the future.

The most significant aspect of the spot market is that an actual exchange takes place between two parties.

CFDs (Contracts for Difference)

There are scenarios where you may not actually want to take delivery of an asset as you believe the asset will in the future increase in value and are planning to sell the asset at a profit. There can also be cases where you believe the value of an asset will decrease in the future and want to make a profit from the decrease.

CFDs can be great financial instruments for investors to use in these types of scenarios and brokers such as Olymp Trade have adapted their platform to cater specifically for this type of trading.

With CFDs, an investor enters an agreement with the broker based on their analysis of the future price of an asset, regardless of whether they believe it will increase or decrease from the current “spot” price. In these cases, the broker is the second party in the transaction, rather than another investor, and enters into a contract over time for the price difference of an asset.

Let’s take a look at an example:

You think that the Euro (EUR) price will in the near future increase in relation to the British Pound (GBP). The Forex currency pair GBP/EUR is the underlying market for your prediction.

If the value of the EUR increases relative to the GBP, this means the amount of GBP needed to buy is more, so you open a Buy order at the current price. If you want to exit the transaction at any time, you simply close the agreement and the difference between the two prices is yours.

If the value goes up as per your prediction by 45 GBP, then you would make 45 pounds profit minus the commissions for the transaction.

CFDs can be sold in the same way by opening a Sell order. The underlying principle is that if the underlying asset moves as you predicted, you will make a profit and a bigger movement in that direction will mean a bigger profit.

This is different form traditional spot trades where assets are actually held and later sold to another party that want to buy.

Advantages of Trading CFDs on Olymp Trade

Trading Forex CFDs on Olymp Trade gives traders several benefits over the spot market.

1.   Olymp Trade’s Multipliers Provide Better Leverage

Traders on Olymp Trade can trade CFDs at up to 500 times their investment amount by using Olymp Trade’s multiplier system. This results in trades that are much more profitable. As the multipliers don’t work like typical leverage, a trader only risks losing the amount invested and not the leveraged (borrowed) amount.

2.   Profit on Markets Moving Down

With CFDs it is possible to profit from markets moving downward without actually having to buy the asset to “short” it and without needing to buy it at the “short” time or price.

Significant profits can be made even during times when the markets drop.

3.   Asset Don’t Have to be Delivered

As mentioned earlier, most traders are not actually interested in holding onto a specific asset for long, and CFDs allow them to trade more easily using only the asset’s value. This reduces hassle and transaction costs.

Leverage at Olimp Trade
Leverage at Olimp Trade

If you open a trade using $100 of your own money and use a multiplier of 500x on Olymp Trade, you could make 500 times the profit off a right prediction of the direction the price moves. Even a small movement of 1% in the correct direction will make you a $500 profit, minus the commissions.

Leverage in the Forex market at Olimp Trade
Leverage in the Forex market at Olimp Trade

What is even better is that if the price moves opposite to what you predicted, the most you can lose is the amount of $100 that you invested. You can also get out of the position before you lose your $100. If you use the Stop Loss function available on the platform, you reduce your risk with the spot market significantly because you won’t have to look for another trader that is willing to pay your price.

Summary

Besides CFD and spot trading, there are many other ways to trade in financial markets, especially with Forex, where there are many variants like digital options, spread betting, and more. The advantages of using CFDs are however pretty obvious when compared to other Forex trading methods.

It is not difficult to see why CFDs are becoming increasingly popular in emerging markets such as Forex trading in Malaysia, India, Africa, Indonesia, and South America. Needing only a small deposit of $10, traders are able to use Olymp Trade’s multipliers to make substantial profits while reducing the risk.

If you are not yet using the Forex side of the Olymp Trade platform, you now have a very good reason to begin.

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