Contracts for Difference, also known as CFD, is a derivative instrument that is priced based on the underlying asset that it represents. Some of the common categories of CFDs are cryptocurrencies, Forex, stocks, indices, and commodities. It is actually pretty much every financial instrument that is tradable in the market nowadays.
Facts About CFD Trading
CFD trading allows you to speculate on the price movement of your chosen underlying asset. When you speculate, there are two possible outcomes – whether the price of the asset will rise or the price will fall. Make sure that you can take advantage of the price movement whether it goes up or down because that is one of the benefits of trading CFDs, you can profit no matter what the movement of the market may be.
In CFD, you allow the exchange of the difference between your entry price and your exit price which is known as the spread. The losing party will pay the spread. It is your call if you want to trade long or go short. As you have noticed, CFD is totally different from traditional trading or investing where you can only benefit if the asset’s price is up.
One important fact about CFDs boils down to the ownership of the underlying asset. You don’t take possession of the assets that you trade in CFDs. For company stocks, you won’t benefit from the dividend because you don’t own the asset personally. But there is a counter-benefit for this. You only have to pay a portion of the real market price of the underlying asset and you won’t pay for its taxes because the asset is not under your possession. Despite that, you can speculate in the market using the full amount of the underlying asset and also get full profit if your speculations are right.
Finding a Reputable Trading Platform
The first decision that you will make in trading CFDs is choosing a trading platform. Trading platforms provide you with a comprehensive number of trading tools and educational materials to help boost your profit. Losing trades will still come and go even with the use of a reputable trading platform. But you can have peace of mind that despite the losses, you still get over each trade and gain some profit, nonetheless.
When picking a trading platform, check for its credibility and licensing. Is it regulated by government agencies tasked to eliminate frauds and illegal activities in trading? Compare trading platforms with the trading tools that they offer, the resources, leverage ratio, margin, technical and fundamental analysis, security protocols, and their customer support.
Using Leverage With Great Caution
Leverage is one of the key advantages of CFD trading. It is the reason for the popularity of CFDs. As much as its advantages, there are disadvantages of using leverage that you cannot simply turn a blind eye to. Leverage in CFD allows you to open a much larger position using the capital which is not entirely your own. Therefore, if you lose in leveraged trading, you will have to pay more than the money you’ve invested.
