CFDs are financial derivatives that can be used to take advantage of short-term price movements across a wide range of asset classes. For the time being, conditions are favorable for the usage of such instruments, given many brokerage houses are offering competitive conditions for retail traders. However, beginners need to know how diversified these CFDs are and that is why today the topic of this article is what exactly can be traded with these instruments.
The global currency market (forex or FX) is the most liquid of all markets, averaging more than $5 trillion in daily volumes. Due to many technological developments, any individual using a desktop platform or a forex app can get involved and trade CFDs based on major, minor, or exotic currencies. Due to increased liquidity, spreads are generally tight, especially when it comes to leading FX pairs like EURUSD, GBPUSD, or AUDUSD.
Getting involved in popular stocks might be expensive for many retail traders, given the largest companies in the world have a higher equity value. Trading CFDs based on stocks means the ability to use flexible leverage and thus gain a larger market exposure with a lower deposit. Stock prices had been volatile in the past year and even though the pandemic seems to be in the rearview mirror for the financial markets, issues like tax hikes and interest rate normalization are expected to keep activity elevated.
Some retail traders are more risk-averse and desire to get involved in equities without having to deal with increased stock volatility. Trading indices CFDs is an option since average daily ranges are much smaller. By using these instruments, traders get exposure to tens or even hundreds of stocks that are part of an index with only a single contract.
The US stock market indices are currently trading near record levels, alongside other developed or emerging markets, creating many opportunities for retail traders around the world.
Similar to indices, CFDs based on leading ETFs offer an exposure to a basket of stocks by buying a single contract. ETFs have been increasing in popularity since the 2008 financial crisis, as market participants become aware of the need for diversification, without having to pay commissions for each individual stock.
Higher inflation expectations combined with an imbalance between demand and supply have been putting commodities under the spotlight for 6 months now. Both retail and institutional traders/investors are actively trading commodities, generating higher volatility on an intra-day basis. Trading commodities CFDs thus becomes an option and with brokerage houses covering them, any individual can get involved from the comfort of their own home.
Although they are not as popular as the asset classes previously mentioned, CFDs on assets like bonds can also be available for trading. Most of the time, these are heavily traded by institutional players, but retail traders can also trade them since most of the brokerage houses have a diversified asset coverage.