Contract for Difference or CFD trading is a consensus between two parties that allows them to exchange the difference which exists between the opening and closing price of contracts. Basically, CFDs allow you to trade on prices which are live in the market right then. However, you do not have to own the underlying financial instrument on which the contract has been setup. As such, by investing only a small amount, CFD trading lets you win big money.
CFDs can be used to forecast the direction in which market prices will move in the future without any regard to the fact whether the forex markets are experiencing a rise or going through a decline. As such, there are a number of CFD trading options which you can try in financial markets. For instance, you can opt to sell your asset or go short on it, which allows you to gain profits from the falling prices. You can also go for a portfolio hedge which will permit you to offset a potential loss that you may encounter.
Just like other methodologies, CFD trading allows you to gain access to different financial markets that sum to over 10,000 in number. Any reputed CFD broker would offer you prices on several different assets such as indices, commodities, currencies and stock.
Spreads and Margins
The basic characteristic of CFDs is the buy and sell price. The difference between these two is referred to as the spread.
Generally, the buy price will always be more when compared to the sell price. Since you can view both, it is easy to determine the spread for every trade. For every market, there is a different spread which is subject to change if the market conditions change.
Margin is the amount of money that you have to invest in order to open a position. It is expressed as a percentage of the total value of the trade position.
Steps Involved in CFD Trading
- If you are new to forex trading, you should start by opening a demo account. This will let you practice the methods without having to trade with real money.
- Once you get a grip of things, open a live account. You will have to provide a few necessary details to your broker, and then your account will be set up.
- Your broker will provide you a unique username and password which you will need to access your account.
- Add some money into your account and start trading.
Advantages of CFD Trading
There are several advantages when you trade in financial markets by using CFDs.
- You do not have to own the instrument on which you set up your contract. As such, only a small amount has to be invested for trading purposes.
- CFDs let you gain instant access to financial markets around the globe.
- The deposit amounts for CFDs are fairly low with most brokers, which makes it a good choice for individuals who are new to CFD trading.
- You can trade on a margin as low as 1% and you can use leverages bearing ratios of 100:1.
- You do not have to pay any extra charges or commission of any sort when using CFDs.
- You can easily manage the risks involved with portfolio heading.
CFD trading allows you to maximize your involvement in the forex market. Using this strategy, you only have to invest a small amount of your total invested value, and you will still be able to avail the same level of exposure. This implies that your gains would be maximized if the market moves in your predicted direction. However, there is a huge risk involved with CFDs. The problem is that your losses magnify in just the same way as your gains. This can happen when conditions become volatile and the spread starts to widen.
As such, you will need to make intelligent moves in order to reduce the high degree of risk involved with CFD trading. You could use different risk management tools to limit your losses without having to compromise on your profit margins. Examples of this include stop loss orders, guaranteed stop loss orders and hedging.