What is CFD Trading?
Contract For Difference is a financial derivative trading instrument in which you can trade on the price movement of the financial markets. It is a contract of difference between the buyer and the seller whereby the profit or losses are based on the change in the price of the underlying asset within a specified timeframe.
CFDs are similar to binary options but, unlike binary options which the potential return is predetermined, CFDs profits or losses depend on the difference between the opening price and the closing price of the contract within a specified timeframe.
Ever since the introduction of CFDs in the early 1990’s, investors/traders have been very much attracted to it because of its low investment requirements. In CFDs traders have the ability to go long or short on an asset and also, U.K traders can avoid the stamp duty as CFDs are derivative products.
How to Place a CFD Trade
- First, you need a CFD trading broker
(Your Capital is At risk)
- After Opening a trading account, with a CFD broker, you make a deposit to the CFD broker, depending on the minimum deposit of the CFD broker, as well as the amount you intend to invest
- Choose a contract you will like to trade
- Place a trade
- Enter the size of the trade
- You can place a stop loss if you want
- If you would want to go long on the market, you chose the ‘buy’ option and if you’ll want to go short, you chose the sell option
- Monitor and close your position
Benefits of Trading CFDs
There are several benefits to trading CFDs which includes:
- You can trade when an asset is rising or falling
- Most CFD brokers offer global market access from their platform, which gives investors/traders the ability to trade whatever asset they want to
- CFDs offer lower margin requirements, which means less capital investment for the traders/investors and greater potential returns
- You can trade 24hours a day on a variety of assets, which includes: stocks, index, currency, treasury and commodity CFDs
- CFDs provide a much higher leverage than the customary trading
- There is no payment of stamp duty on profits made
Trading CFDs doesn’t mean buying the actual physical share, what you do in CFDs trading is, buy or sell a number of units for a particular asset depending on whether you think the asset price would rise or fall. Assets to trade include treasury, stock indices, commodity, shares and currency pairs.
If you get news or report that Lufthansa will plummet, you can watch the price behaviour and do some analysis for a few days and if the price seems to be falling, there are two things you can do, you can either buy or sell. But it’s in your best interest to sell.
To buy means the stock would go higher than the buy price
To sell means the stock would go lower than the selling price
Your profit or loss is determined by the movement of the stock price. If the price goes lower than the selling price, within the specified time frame, then you’re in profit, and if it goes higher within the specified time frame, you’re in a loss.
What is Leverage?
Leverage is an investment strategy which involves the use of borrowed money to increase potential returns of an investment. For example, a CFD position worth $2000 may only require a deposit of $200, if the margin rate is 10%. CFDs can increase your return on investment as well as magnify losses.
What is Margin?
A margin is a form of borrowed money that is used to invest in financial instruments. CFD trading with margin allows the opening of positions with only a percentage of the total value of the position. Using margin isn’t necessarily for everyone, except you understand the risk involved as well as know what you’re doing.