More and more investors are earmarking the Forex market as an important investment option. Both local and foreign market players such as Saxo Capital feature an exhaustive list of trading instruments for active traders.
Before you dive into actual trading, it’s crucial to know what exactly CFD trading is, how it works, and the benefits you stand to gain.
What is CFD Trading?
Contracts for difference (CFD) is a system of trading, which allows you to speculate on either the rise or fall of prices of specific assets on the Forex market. It’s an arrangement involving two parties.
They agree to exchange at the close of the contract the difference between the opening price and closing price, which is then multiplied with particular stocks being traded.
Some of the widespread financial instruments that you can venture in include commodities, indices, stocks, and currencies
How CFDs Work
Unlike shares, you do not need to own the stocks; all you have to do is monitor the price movements. Besides, you can trade on margin, and choose to sell or buy depending on price movement. You can choose from a variety of assets, including indices, commodities, currencies, treasuries, and even stocks.
Here is an image of a typical CFD platform.
Getting started is quite easy. All you need to do is to identify a reputable broker in the options trading industry and sign up to create an account. Initially, you can sign up for a demo account to learn the ropes.
The demo account is free of charge and comes with unlimited virtual funds. Once you are through, you can create a live trading account and start trading right away.
What are the key Features of CFDs?
CFD trading offers immense flexibility, depending on price movements. It merely suggests that you can elect to go short or long, and without necessarily owning a stock. For example, after investing in an asset, you can choose to immediately open a short position on falling shares to make an instant profit. Other key aspects of CFD trading include:
- Margin leverage: CFDs come as leveraged trading instruments. All you have to do is open a position by depositing a small percentage of the aggregate value of the trade. It’s what is usually referred to as trading on the margin. Leverage is often more of a double-edged sword, which allows to you magnify your earnings, but can also lead to massive losses.
- Trading costs: CFD comprises of various trading costs including spreads, holding costs, and market data fees. Spreads are the difference between the selling and buying price, which you are obligated to pay whenever you are trading on CFDs. Holding costs are dependent on any open positions in your account after the close of the daily trading session. The holding cost can range on the positive or negative subject to the price movement as well as the current holding rate. Lastly, market data fees may apply whenever you need to access specific price data, where you have to subscribe by paying a fee.
What Are the Advantages of CFDs?
Investors can benefit from CFDs in the following ways:
- Expansive market access: the uniformity that is found in CFD trading instruments allows market networking on a global platform. Users can access the most suitable instrument from anywhere across the globe, and around the clock.
- High leverage: CFDs are quite popular because of the amount of leverage they provide to investors. Once they are accompanied with lower margin requirements, possibilities for less capital outlay for trades abounds. This eventually assures traders of excellent potential earning.
CFD trading is quite popular because of the ease of trading is offers. Getting started is also quite simple. You do not need to own actual shares. Instead, you need to speculate on the movement of a specific stock.
Besides, you can easily access high leverage which can amplify your profits. All you need to exercise is a risk management strategies to minimize losses.