What are the most popular CFDs to trade?

Aug 31, 2020 04:53 AM ET
What are the most popular CFDs to trade?

Overview

Due to the digital age’s advancement in the last decade or so, various financial markets have gained popularity. While some, like stocks and commodities, have a long history, others such as forex have arguably become more popular in recent times. Analysts attest to this fact that, by market cap, forex is the world’s largest financial market, boasting a daily trading volume that exceeds $6 trillion. Somewhat of a newcomer, cryptocurrencies are also accelerating in growth and popularity. 

With so many instruments at one’s disposal, it begs the question of which is the best CFD to trade since each brings their unique advantages and disadvantages. There are also notable intersections within specific financial markets that investors like to use as a hedge against their core traded instrument or to provide more trading opportunities. 

There could be distinct arguments made over which instrument is more straightforward to trade than another. Perhaps the first common thread with them all is getting to a level of supreme understanding can take years, making them very complex CFDs to trade. Another common thread with CFDs is that they are highly volatile and leveraged to a certain extent. It is the leverage that can make them extremely risky if investors are not cautious enough.

Forex

Forex

The foreign exchange market (forex) is probably the most popular of financial instruments because of its market cap and its real-world uses. The basic principles of trading forex are simple to grasp. Because we express currencies in pairs, you are always betting on the strength or weakness of one against another.

Forex is a lot more dynamic than most instruments, making it more suitable for many traders who don’t intend to hold positions for a very long time. Unlike stocks and crypto that always have IPOs and ICOs respectively, few currencies exist where investors can indeed ‘buy and hold’ due to its highly dynamic nature.

Some brokers offer unlimited leverage within forex. On the one hand, there is the potential for massive profits, but on the other hand, it can quickly wipe out trading accounts. However, if used responsibly, the capital requirements are much lower compared to other CFDs; traders can open an account for as little as $1.

As a result, forex is one of the cheapest instruments to trade where the spread is concerned. Relatively low spreads and commissions exist in popular pairs such as EUR/USD, GBP/USD, EUR/JPY, and GBP/CAD. Being a market that is open 24/5 for a vast majority of the year means getting in and out with ease. 

Stocks

Stocks

There has always been a perception that stocks form part of a well-diversified investment portfolio. They are essentially a traditional, old school financial instrument with a plethora of divisions ranging from small-cap to large-cap companies in many stock exchanges worldwide. As with most instruments, stocks are susceptible to the possibility of losing money quickly, and gaining enough knowledge and experience is cumbersome. They need a lot more money to trade, unlike forex, due to the low leverage which brokers offer, and the costs are a little more pronounced. They are also open for limited hours than with forex.

One of the unique things about stocks is IPOs (Initial Public Offerings), which offer opportunities to hold a new stock for months and years. This investment style suits individuals looking for something they can hold for this long to get cheaply. While there is a place for short-term investors, historically, stocks have performed better in the long-term.

Indices

Indices

Indices are perceived as a better alternative to traditional single company stocks because they comprise several different companies rather than one. An index is a basket of the biggest companies within an economy or region. For example, the S&P 500 includes the top 500 American companies, and this index is one of the most well-known of all due to its massive market cap and strong correlation with other non-index markets. Other popular indices include the Nikkei, DAX, US30, and the FTSE 100.

For the most part, indices are a lot easier to understand and follow as they are a collection of various stocks into one instrument, which is one of their main attractions. Indices tend to move in a more streamlined fashion with minimal sideways movements or consolidations than forex.

The slight drawbacks with indices are their massive tendency to have price gaps, and their spreads and capital requirements are typically higher, resulting in lower leverage. Also, most indices markets are open at more limited hours as with stocks. These are not massive drawbacks to detract investors as their advantages are worth exploring.

Cryptocurrencies

Cryptocurrencies

Bitcoin is the most well-known of cryptocurrencies and has witnessed unprecedented growth, particularly in 2017, where it reached record-high prices. Several other cryptocurrencies have experienced similar growth over the years, such as Ethereum, Ripple, and Litecoin. Cryptocurrencies have many real-world uses like standard currencies, making them suitable investments for people that use them for such purposes.

One of the factors which set cryptocurrencies apart from other instruments is that they are open 24/7 with some brokers. However, being a relatively new market, there is significant intraday volatility due to its emerging and growing interest. Being a new market means it has not gained as much predictable ground from a technical analysis standpoint since there are only a few years of price data. On the other side of the spectrum, being a new market means more room to the upside or astronomical growth due to its perceived market value as a revolutionary currency.

Like with indices and stocks, the leverage offered with cryptocurrencies is significantly less than forex. Nonetheless, cryptocurrencies are going to exist in the future as the world starts utilizing more blockchain and converting physical money into digital money.

Conclusion

Traders are spoilt with choice when it comes to the most popular CFDs to trade, and those mentioned above only scratch the surface. Within each one, there is a wide range of different types of markets to explore. The risks associated with each are relatively the same since they are all leveraged products. The common factors for success in any of the CFDs lie in a deep understanding of technical and fundamental analysis, solid discipline, and money management.


Best Forex Robots