Leverage, Margin Trading, Derivatives, CFDs
Let’s first get the basic terminology down. Leverage, margin trading, derivatives, CFDs all share a common theme, but they mean different things.
We’ll briefly go through each term.
Leverage, in the most general sense, means using borrowed funds to increase the potential return of an investment. For example, financing a business with debt to help it expand more would mean deploying leverage.
Closer to home, you can use leverage when you trade. You borrow funds to open positions, larger than you could without these funds. As a result, what could have been your gain trading without leverage, gets multiplied by the factor of leverage you use.
Because you’ve not only utilized your own capital but also the borrowed capital to derive your gains, you increase the return on the investment of your own funds.
Easy so far! ➡️➡️
Margin Trading is a strategy that involves borrowing money from a 3rd party to open positions. In our case, CEX.IO Broker is that 3rd party that provides you a credit.
This credit is extended to you every time you open a position. The borrowed funds return back to the Broker when you close your position.
So, all margin trading involves leverage. But, since leverage means using borrowed funds for anything, not all leverage is margin trading. 💁🏻♀️
That’s quite clear! ➡️➡️
Derivatives are financial instruments whose value relies on (or derived from) some underlying asset. As the price of the underlying asset fluctuates, so does the value of a derivative.
Derivatives come in different types: futures, forwards, swaps, options, CFDs, and others. They all have different mechanics. Yet, the common feature of all these instruments is that you “enter into a contract” at a specific price of an asset and then become exposed to price fluctuations of that asset going forward.
The asset, by the way, can be anything that has a can be priced: Bitcoin, oil, S&P index, etc.
Some, but not all, derivatives are traded on margin.
CFD is one example. ➡️➡️
CFD (Contract for Difference) is an instrument allowing traders to trade in price movements of an asset without actually owning, buying, or selling that asset.
With CFDs, you can benefit from the asset’s price moving up and down.
If you expect the price to increase, you open a Long (BUY) position. If you turn out to be right, you make a profit. If the opposite happens – the price difference represents a loss. The vice versa is with a Short (SELL) position when you expect the price to decrease.
In that regard, trading CFDs is very different from the spot market where a digital asset actually gets delivered to you.
With CFDs, you do not need to time the market waiting for the right moment to start trading. All you need is to correctly anticipate the eventual direction of the price movement. We say “eventual” because, once you open a position, the price may move against you. But, if later it goes in the direction you’ve expected, you can close the position with a profit.
Read on for more details! ⤵️