Financial Education

What is CFD Trading?

CFD trading allows you to speculate the price movements of various financial assets. Since the potential is huge, you need to understand what is CFD. 

Generally, CFD is a contract for difference and it lets you to trade market instruments without necessarily having to buy the assets. It creates a contract between you and the broker with regard to the movements of the assets in question. Since they are derivatives, you don’t have to purchase the assets but you only need to predict the movement of the prices.

What is CFD trading and how does it work?

Every time you open CFD positions, you will be deciding the amount you intend to trade and as long as the market is favoring you, the profits increase with every point gained. If you are convinced that a certain market is going to rise, you will buy and the returns will accumulate in proportion to the increase in market prices. Nevertheless, if the market moves against your predictions, brace yourself to make losses equivalent to drop in points.

For instance, if you are convinced that the oil prices will increase you may buy 5 CFDs at a price of 5000. If the market gains 30 points, you are set to get a profit of $150. Nevertheless, if the price falls with 30 points your losses will be $150.

But this shouldn’t scare you since you can get profits from a falling or a rising market. Basically, you need to sell when you expect the market to fall and buy only when the market shows signs of rising. If you are still wondering what is CFD. You’ll be pleased to know that it is flexible since you have the option of going long or short and this makes it a good option to trade short-term movements.  At the end of a CFD trading day, you are required to pay a holding cost which may be negative or positive.

The pros and cons

Every time you attempt to figure out what is CFD trading, you have to look at the good and the bad.  CFD comes with a better leverage that you can get with other trading options. Basically, it stands at 2% of your margins but it can also go up to 20%. The low margin required implies that there is a low capital outlay which translates to a higher potential to make good profits. At the same time, you won’t be limited to the minimum amount of capital you can invest or even the restricted trades you can make in a single day. Basically, CFDs mimic real corporate actions that are going on in the industry and this means you can get dividends as well as take advantage of stock splits.

A majority of CFD brokers provide products from reputable markets around the globe. As a trader, you will have the opportunity to trade with an option that is available on the platform offered by your broker. As a result of stock, treasury, index, currency, sector CFDs and commodity, traders utilizing various financial vehicles can reap high benefits.

Basically, the one of the most important thing when you want to know what is CFD is that it’s not plagued with short selling rules and as such, any instrument is open to shorting at any point. Since you do not own the assets in question, you won’t have to pay the shorting or borrowing cost. At the same time, there are low fees applied when you trade CFDs and your broker earns when you pay for the spread.

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Justin Weinger

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