Guide to CFD Trading: Important Things to Know
Updated On March 16, 2023 | by Joseph Williams
Trading is one of the most popular and profitable activities in the world. This is the reason so many people are learning to trade. It’s a great way of building your wealth.
Speaking of trade, CFD trading is quite popular among traders. CFD stands for Contract of Difference which is an agreement between sellers and buyers to trade financial instruments without possessing the asset.
The best thing about CFD trading is that it doesn’t require a heavy investment. You can easily execute a big lot size with a high-leverage trading account. In CFD trading, you can go both long and short. You can read more about this here.
What is CFD Trading?
To put it in simple words CFD trading is the speculation of the underlying value of an asset such as indices, cryptocurrencies, shares, forex, commodities, and more.
It can be described as a type of derivative that allows you to trade price changes in the financial market. In CFD trading, you don’t own the asset. You are only trading on the price movements.
What can be Traded as CFDs?
CFDs can be traded for a variety of financial assets with an attached price value. This is because you are not supposed to possess the asset under any circumstances. You are only allowed to trade its price changes.
Some of the common CFDs are:
There are various types of commodity futures available in the financial market including livestock, metals, agriculture, energies, and more. These are considered important goods in the international trade market.
These are issues by corporations and the government. These units of debt are traded publicly.
Cryptocurrency refers to digital money that represents a new kind of financial asset.
Exchange Traded Funds are investment funds that are traded on stock exchanges. It holds assets such as commodities, bonds, and stocks.
Indices are statistical measures that are used for performance tracking of a selected set of stocks. The stocks can be related by the stock exchange, market sector, country, or industry.
It refers to units of ownership of companies that are traded on exchanges. However, when they are traded as CFDs, you can either go short or long.
This includes the trading of major currency pairs. You buy and sell currencies based on their exchange rate.
CFD Trading Essentials
If you are interested in CFD trading, keep the following things in mind.
It is Leveraged
In this type of trading, leverage allows you to get full market exposure even when the deposit is small. In other words, you just have to put up a percentage of the total cost of the position to access the full value of the trade.
It should be noted that potential losses and gains will be magnified. This is because it will be influenced by the full size of your position.
You can Go Short or Long
In CFD trading, you need to guess whether the value of an asset will fall or rise. If you believe that the asset’s price will increase, you buy or go long. If you predict that the price will drop, then you sell or go short. The outcome will determine whether the profit or loss.
Before getting into CFD trading, it is important to understand how it works. Making random decisions can make you lose your money. You should also take steps to curb the risk involved.
CFDs Behave Similarly to Their Underlying Market
For those unversed, CFD trading is meant to mimic its underlying market. The value of the CFDs is affected by the movements in the underlying market.
While some asset prices will incur a commission, others have a spread wrapped around them.
Why Should You Get into CFD Trading?
There are plenty of reasons why people get into CFD trading. Some of the valid reasons are:
CFD trading in some territories comes with tax-related benefits.
Since CFDs are leveraged units, your initial trade is only a percentage of the value of your position.
It gives you the chance to offset your losses against your gains.
Some markets allow you to trade beyond the trading hours. However, the opening price might differ from its regular trading hours.
With CFD trading, you can either go short or long, depending on the market conditions.
CFD trading has become increasingly popular in the past few decades. It allows you to trade a variety of asset classes without actually owning the asset. All you have to do is predict the price fluctuation of the financial asset and then make your decision. CFD trading needs knowledge and experience. So before you enter the CFD world, make sure that you have learned the way it works.