Probably, if you are a beginner in trading and trying to penetrate the world of financial markets, you must have come across the term “CFD” more than once. CFD is an abbreviation for Contract for Difference. Nowadays, CFD has become very popular, allowing users to bet on price fluctuations of such assets as stocks, commodities, indices, and currencies, without owning any of these actual goods. Online CFDs trading might be overwhelming for the first time, but at least once you get into understanding the basic framework, you can base the jumping-in.
A CFD is basically an agreement between you and your broker to exchange the difference in the value of an asset from when you open the contract to when you close it. If the asset price varies in your favor, you make some profit. However, if it works against you, then you make a loss. One of the significant advantages of using CFDs is that one is able to trade both rising and falling markets. This means that one will win in both cases: whether an increased price of oil will take place or a decline in a particular company’s stock price.
In Online CFDs trading, you don’t even need to own the asset itself, since here you are basically betting on the price movement of the chosen asset. So, if you feel that the price of gold is going to rise up, you can start a long position, and if you think that it will drop down, then you can open a short position. This flexibility allows you to place trades on your bets of what will happen about market conditions, and that is one of the things why CFDs attract so many traders across the globe.
An important feature of online CFDs trading is that one can apply leverage. This means that you get a chance to control a larger position than you possibly could using your available capital. The only requirement from that respective company is the opening balance and margin provided. It’s like borrowing money from your broker to increase your potential profits, but leverage also amplifies the risk. It can magnify gains and, well, you guessed it, losses.
The third aspect is related to spread. Spread is the measure of how far apart the buying price, that is, the ask of the asset, is normally from the selling price or the bid of an asset. In online CFDs trading, this is how brokers normally profit. Spread varies between the asset you are trading in and market conditions so it’s something important enough to bear in mind when you are creating your strategy for trading.
Risk management is another significant aspect of trading in CFDs. It is always necessary to set stop-loss orders so that all your losses are not wiped out at one go. Stop-loss orders automatically close your positions if the market moves against you by a certain amount, thereby helping you to risk-manage as well as avoid extreme losses. While trading online CFDs, it becomes very important to control the risks associated with them, especially while using leverage.
Trading CFDs is great fun and can turn very profitable, but it is not a way to make money without some risks. First, there is the right way to know how to use CFD, practice on a demo account, and implement risk management tools to protect your capital. Patience, practice, and a good strategy will make trading online CFDs a notable part of your trading journey.