A contract for difference (CFD) is an arrangement wherein the difference between an item’s current value and its value at a selling date is settled through cash payments. This system is different from most forms of trading, which are largely settled through physical goods or securities. Investopedia describes this as an easier method of settlement since the gains and losses (also known as the difference) are paid fully in cash. Gold CFDs work the same way, where investors can essentially trade gold as a security without actually owning it. This makes trading easier to get into because of the smaller initial cash outlay and the fact that you don’t need to hold on to the actual goods.
Although gold CFDs are usually associated with gold futures, it’s important to note that they are different products. Contracts For Difference differentiates the two in an article by explaining that gold futures is an agreement to buy or sell the product at a specific price, on a specific date. Trading gold CFDs, on the other hand, doesn’t entail a fixed price or date. It is simply an agreement to pay or receive the difference of the price of gold between the beginning and the end of a contract.
One of the benefits of gold CFDs is that there is no expiration date to them, unlike with other investments. This means that they can be held until the investor deems fit. Trading gold in general also has its other advantages. Finance expert Allan Smith points out that the price of gold has been rising, especially due to poor economic growth and uncertainty in global markets. That’s because gold offers perceived stability as opposed to stocks, which only rise in value when a company grows. On the other hand, gold is stable because it has value in and of itself. This makes it one of the oldest and most exciting ways to invest in the global markets, especially in times of war, turmoil, and disruption, when people lose confidence in their currencies.
That said, the Independent Investor lists the important things you need to understand before you start trading gold CFDs. There are two very important concepts to grasp before you start trading: the market for gold, and a basic knowledge on trading CFDs. In this regard, FXCM’s Gold Trading Chart can act as a novice trader’s best friend, as candlestick charts show how gold CFDs perform over the course of a couple of years. Understanding how to read charts like these is very important before you start trading, because these will inform you of the price of gold every day — from the closing and opening prices, down to each day’s high and lows. Moreover, this tool can help in analyzing past prices to understand the precious metals’ behavior. It can ultimately help you in making more informed investment decisions.
Once you understand the pricing cycle of gold, trading gold CFDs can be very lucrative. While it’s essential to know how to analyze graphs, it’s also important to be on the lookout for uncertainties in the market or difficulties in the economy that could lead investors to turn towards gold as a an investment. As with any security, timing and calculation is the key to success in investing in gold CFDs.
Article contributed by Dave Jones.