What is CFD Trading?

For anyone with an interest in online trading, contracts for difference (or CFDs) provides a good way to get started. It’s a method available around the world, from Australia to Europe to South Africa. CFDs were designed in the ‘90s and have since grown in popularity. Almost any financial instrument can be traded with CFDs. This includes stocks, commodities, currencies and indices. If you want to trade the stock market, you can. If you prefer the foreign exchange market, that’s another good opportunity.

This quick guide should help you understand the underlying principles behind CFD trading. Then you can start trading them.

CFDs defined

CFDs represent a contract between a buyer and a seller to exchange the difference between the opening and closing value of a contract. CFDs are a unique form of financial derivatives trading, in that they let you profit from rising as well as falling markets. Traders base their decisions on the rising and falling prices of financial instruments. When they choose contracts for difference, they are trading on the value of an underlying asset, like a forex pair. This means that a physical product never changes hands. CFDs are purely financial transactions.

If you do decide to trade CFDs, you would trade an asset in units, which can be bought or sold. It is quite straightforward to set up an account with a broker and begin trading CFDs. All CFD instruments have a sell price and a buy price. The difference between the sell and buy price is known as the spread.

Another benefit that CFDs provide is leverage, which means trading on margin. Traders have to deposit only a percentage of the full value of their trade to enter a position. So, they don’t need to have a fortune saved up ahead of trading for the first time. They just need a small pot of money. Leverage is great if the trade moves in your favour. But remember, also, that leveraged trading can be risky and you could end up losing a lot more than your initial investment if you make a loss on your trade.

Learn to trade with CFDs

Choosing an online broker is the first step in learning to trade CFDs. Many platforms provide practical training resources, such as videos, that explain the basics. Once you have a general understanding of how CFDs work, you can practice using a demo account. Virtual money is supplied, so that you can get to grips with the markets. This also helps you to decide which instruments to trade.

Part of your training might involve looking at how to use technical indicators. Political and economic announcements can also impact the financial markets.

Novices need to put steps in place that minimise the risks of losing all their capital too. Trading with leverage has a downside in that you can lose more than you start out with. Stop-loss orders lower the chances of that happening. A broker will allow you to close your position once it reaches a particular pre-defined price. You can learn about different risk management strategies during your training.

CFDs provide many advantages for both beginners and more experienced traders. It’s important that you do plenty of research before trading your hard-earned cash.

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