words Al Woods
MD: If CFDs are new for you — read this article. Learn about this type of trading and find out how to make more money on it.
What Is CFD Trading, and How Does It Work?
A CFD (Contract For Difference) is a financial instrument similar to an index or a stock. CFD allows trading with the relevant asset even if you do not own it. Make CFDs only with certified international brokers to be safe and not lose your money. Look for the services that can provide you with the large leverage, powerful information support, and minimum commission. If you still wonder what are CFDs — check various blogs and articles to expand your knowledge on this topic.
CFDs are classified as an OTC financial derivative that allows you to profit from changes in the prices of various financial assets, including index futures, trading futures, cryptocurrency, stocks, and exchange securities. In that way, they attract so many traders and are popular already for several years.
The CFD price is the price of an asset (stock, index, or futures). If the asset price increases, so will the CFD price as they totally depend on each other. An essential difference is the absence of exchange fees and other disadvantages on the exchange. CFDs allow you to take advantage of the leverage that is usually not available with stocks. They have gained immense popularity over the past few years.
You can make a profit by buying CFDs (if you expect their price to rise) or selling them (if you are sure of the opposite market trend). Your profit will be determined as the difference between the purchase and sale of CFDs.
To trade Contracts for Differences (CFDs), you need equity, as well as leverage to increase your capital. It is great when your broker can offer leverage of at least 20 times your invested capital. There also should be no fees or commissions — everything you earn is yours. You can buy or sell a contract to profit from the rise or fall of the market. Check the offers on the Forextime website and discover forex trading in South Africa.
One single account provides access to the market for indices, oil, gold, silver, and, of course, numerous currency pairs. Received proceeds from the transaction? Use it: open new positions and multiply your income. If you wish, you can distribute your investments to different markets.
CFD trading methods
There are various strategies used when trading CFDs. They are quite simple, so they will be understandable even for novice traders. The most popular is the method for determining a long or short position.
1. Long position
In a long position, a trader buys an asset because they expect its prices to rise in the future. A high level of forecasting allows traders to make significant profits even with small fluctuations in the price of an asset. Transactions can be carried out based on forecasts for both a month and a year.
2. Short position
A short position occurs when a trader foresees a fall in the value of an asset and, accordingly, decides to sell it. But at the next stage, the trader can buy the same asset but at a lower price.
If the forecast for a fall in the asset rate does not come true — its value will not decrease, but will grow — the trader will incur a loss on this position, the amount of which will be equal to the difference between the asset price at the time of the opening and closing of trading. The opposite is also true: if the prediction is correct, the trader will get profit.
A short position allows you to make a profit within short (up to one minute) periods.
It is the “golden mean”, assuming the possibility of entering into futures contracts and trading based on a short-term and long-term CFD strategy. Forextime offers traders the widest selection of commodities, stocks, and stock indices:
- Trade all major commodities with up to 400:1 leverage.
- MetaTrader4 is a convenient platform for trading using a computer, tablet, or mobile phone.
- Trade stock indices in the USA, Europe, and Asia.
- Use long or short positions depending on your vision of market trends.
- When working with stock indices, use a leverage of up to 400:1.
What are the advantages of CFDs?
- There are no commissions as you are not purchasing a physical (underlying) asset, and you have no obligation for that asset. A Contract for Difference is a contract between you and Forextime.
- Trade with leverage. The physical purchase of the underlying asset requires significant capital. By opening a CFD deal, you pay dozens of times less. Remember that leveraged trading increases your profits, but when the market moves in the opposite direction, it leads to losses.
- The margin required to maintain an open position when the market moves in the opposite direction is equal to the margin required to open a position.
- CFDs are generally not subject to fees. However, this depends on the tax policy of your country and some other factors.
- CFD contracts do not lose their relevance over time and do not go out of circulation, since the market is dynamic: an increase is usually followed by a decline.
- Potential risk hedging opportunity. If the trade does not go exactly as planned, open an equivalent reverse position.
- The ability to trade a wide range of instruments on one platform.
Overall, if you have never tried CFDs, it is a good chance to start. Maybe it will be the field of trading where you will succeed the most. The main thing is to learn as much information as possible to know what you are doing. It will also help you to forecast the fluctuations on the market as everything is repeating, and you will be able to spot certain patterns. Like in every field, knowledge will help you to increase your earnings and make you a successful trader even if CFDs are completely new for you.