What are CFDs and How to get started with Trading
A CFD is a contract for difference, which means that it is the variation of the price of a share when entering a contract and when exiting. Trading on CFDs relies on margins. A trader makes a profit or suffers a loss depending on whether the value of a share rises or drops. Such a result of a trade will depend on the position the investor takes. The bet that a trader makes is if the price will rise or fall in the future.
Trading on a Margin
It is possible to trade contracts for difference on a margin because they are leveraged products. An investor can, therefore, trade without putting in the entire quoted amount of the shares. You only make a deposit that serves as the margin, and the CFD provider covers the rest. The advantage here is that traders do not need large amounts of money to get access to the shares they want. A trader should also know that with leveraged products, losses can exceed deposits.
Going Short or Long
As a trader, you can either go long or short when trading in CFDs. Going short means that a trader makes a bet that the price of a share will fall in the future. Alternatively, going long on a trade is when an investor predicts that the value of an individual share will increase and, therefore, sell at a profit. Whether shorting or going long, it is important to consider other charges that will arise such as commissions and financing costs.
CFDs trading comes with its set of risks, and one way to minimise them is through stop and limit orders. Traders can set limits to the losses they are willing to incur. Whether it’s a long or short trade, the trade will close when it reaches that limit.
Understanding Underlying Markets
It is essential to note that in CFDs trading, the trader does not purchase the assets. As an investor, you are trading the contract difference with a CFDs provider. The underlying assets that traders have access to will depend on the providers they use and the trading platforms available. A provider like CMC Markets offers the Next Generation CFDs trading platform with products such as indices, commodities, shares and currencies. One advantage that CFDs offer traders is a chance to trade in the global financial market. If a trader has specific knowledge of a particular market like Forex, for instance, then they can trade CFDs in those underlying assets.
Understanding CFDs trading is imperative if you are looking to get into the market. You also have to find a CFDs provider that you can work with like CMC Markets. You will have to consider various aspects when choosing a suitable provider for your CFDs trading.