CFD, or Contracts for Difference, is a derivative financial instrument enabling investors to trade on price differences of assets like Forex, commodities, indices, and stocks without owning the actual asset.
how to trade using CFDs and some of its benefits:
- Choosing a Broker: Start by opening an account with a financial broker that provides CFDs services. Make sure you choose a broker with a good reputation and strong regulation.
- Select assets: Choose the assets you want to trade, whether they are currencies, stocks, indices, commodities, or others.
- Opening a trading position: Choose the size of the position you wish to open (contract size) and specify the leverage if available.
- Choose orders: Select the type of order you want to use, such as Market Order, Limit Order, or Stop Order.
- Market follow-up: Monitor the market regularly and update your strategy based on developments.
- Closing the position: Decide when you want to close the trading position and take profits or reduce losses.
Benefits of trading with CFDs:
1: Leverage:
You can trade with a larger amount than you own thanks to the use of leverage, which increases the chances of profit, but it must be used with caution because it increases the risks.
2: Diversity of assets: You can trade in a wide range of assets, including currencies, stocks, indices, commodities, and bonds.
3: Instant execution: CFDs trades can be executed immediately, without having to wait for an actual buyer or seller.
4: Trade in the downward trend: You can profit from falling asset prices by entering into short sale trades without having to own the asset.
5: Cost saving: Trading costs can be lower compared to traditional trading, and does not require paying ownership fees for assets.
What is CFD trading and the costs involved?
Trading CFDs is a way to speculate on the underlying price of an asset – such as stocks, indices, virtual currencies, commodities, Forex, etc – on a trading platform like ours. CFD stands for contracts for difference, and is a type of derivative that allows you to trade the price movements of these financial markets. In this type of trading, you will not own the underlying asset – but will only experience its price movements. We offer over 18,000 markets for you to speculate on via CFDs, including stocks, indices, forex, virtual currencies, commodities and more. Traders must understand that trading with CFDs carries risks, and must train well and manage their capital carefully to ensure long-term success.
Know the costs involved when trading CFDs: Most of the time, the cost of opening a CFD position is included in the spread: that is, the buy and sell prices will be adjusted to match the cost of making the trade. An exception may be made to our stock CFDs, as they are not calculated via the spread. Instead, our buy and sell prices are identical to those of the underlying markets, and the cost of opening a stock CFD position is commission-based. Using commission, speculating on stock prices via CFDs is akin to buying and selling stocks on the market.
If you leave a daily CFD position open beyond the specified daily closing time (which is usually 10pm London time, although this may vary in global markets), you will be charged an overnight financing fee. This is to cover the costs of holding your position over the long term – because you are trading with leverage.
How does CFD trading work?
- Open a trading account with a CFD broker.
- Download that broker’s CFD trading platform.
- Choose the asset you want to trade.
Why do people trade CFDs and what are the steps to trading?
Leverage: Since CFDs are leveraged products, your initial deposit only represents a percentage of the value of your position
Flexibility: Because you can buy or sell CFDs, you can trade regardless of where the markets are moving
Longer Hours: You can trade some markets outside normal trading hours. Just keep in mind that the market opening price may differ from its price outside the main hours
Hedging: It provides opportunity to offset some of your losses in exchange for profits
Steps to become a CFD trader:
Learn how CFDs work CFDs work by simulating the underlying markets. While you can imitate traditional trading that makes profits as market price rises, you can also open a CFD position that makes profits when the underlying market price falls.
Know how CFD profits and losses work: To calculate the profits or losses gained from CFD trading, multiply the trading size of your position (total number of contracts) by value of each contract. Then multiply that number by the pip difference between your opening price and your closing price.
Learn how to do a CFD trade: When you have identified the market you want to trade, you are ready to place the trade. If you believe value of the asset, you are trading will fall, you will sell (short selling); If you believe it will rise, you will buy. You can monitor all your open positions on the trading platform, and you can close your open positions by clicking on the close button. If you open your position by buying, you can close it by selling same number of contracts at the selling price
Learn about time frames for CFDs With CFDs, you can either trade the spot market or trade CFD futures – depending on market you are looking to open a position in.
Some important questions for CFD contracts
How do brokers CFD providers make money? the main way of making money is through the spread that place around the underlying market price. The costs of any trade are primarily governed by these two prices, known as the bid and ask prices, which means that you will always buy at a price slightly above the market price, and sell at a price slightly below it.
How do I use CFDs to hedge? You can open a profitable position if one of your other positions starts to make a loss. An example of this is opening short position in a market that tracks the price of an asset you own. Any decline in the value of your asset will then be offset by the profit you make from trading CFDs.
What is the difference between CFDs and futures contracts? When you trade CFDs, you buy a number of contracts in a market that you expect will rise, and sell a number of contracts if you expect the market to fall. The change in the value of your position reflects fundamental market movements. You can close your position at any time while the market is open.
Futures, on the other hand, are contracts that require you to trade at the expected future price of financial instrument. Unlike CFDs, a fixed date and price are specified for the transaction – which may require physical ownership of underlying asset on that date – and must be purchased via an exchange. value of a futures contract depends greatly on market sentiment regarding the futures price of asset, such as the current price movement in underlying market.
Do CFD contracts expire? CFD positions have no expiration dates in most markets, so they can be left open as long as you choose to maintain your position.
