Unlike other traditional investments and other types of trading, Contracts for Difference (CFDs) offer a unique opportunity for a possible massive gain. And just like investors that are gaining from CFD, you can also enjoy the rewards of this type of trade if you understand what CFD is, apprehend the mechanics of the market, and set in efficient risk management measures.
This article explains the meaning of CFD, three (3) important things to know about CFD trading, and we will explore the opportunities in CFD trading.
What is CFD?
Contracts for Difference (CFD) are financial derivatives that permit you (the trader) to speculate on the price movements of different financial assets like commodities, indices, stocks, Forex, crypto CFD, and more, without ownership or taking physical delivery of the assets. CFD traders are concerned with the difference in price between the opening trading position and the closing trading position.
CFDs are contracts between two parties; the trader and the broker to pay the price difference of an asset between the opening trade position and the closing trade position. For more understanding, let’s say you speculate that the price of gold will rise and open a buy position, however, if the price falls instead then you make a loss and if the price rises as you predicted you make a gain.
3 Important Things About CFD Trading
CFD trading is simply defined as buying and selling of CFDs and there are three (3) important things we want you to note about CFD trading.
1. CFD is two-way:
When predicting an asset’s price you follow one of these paths (Once you predict, the outcome determines if you made a profit or a loss):
2. You go long (buy) if you think the asset’s price will go up.
Or
1. You go short (sell) if you think the price will fall.
2. CFD is leveraged:
With leverage in CFD trading, you can get full market exposure with a margin (small initial deposit). This means that with a percentage of the cost of the position you can get exposure to the full value of the trade. Remember, profit and loss are magnified and calculated on the full size of your position, not your margin alone.
3. CFD mimics trading underlying market:
CFD prices are driven by the direction of the underlying market. Some asset prices may have a spread around it and other CFD trades come with a commission. This is determined by the market you are trading.
CFD Trading Opportunities
Traders are closely paying attention to CFD trading as a result of the untouched opportunities for likely gains in the market. Here we are going to give you four (4) trading opportunities in CFD.
1. Leverage:
Leverage is a major advantage and opportunity traders get from Contracts for Difference (CFD). Leverage means you (the trader) can earn exposure to a large position of the underlying asset with an outlay that is only a percentage of the value of your position so you are not committing the total cost at the start.
In leverage, you use little capital to open a position and this could lead to increased returns. Leverage also goes along with the same possibility of increased loss. This implies that CFDs could be very profitable as well as highly risky. Another opportunity is that in some countries leverage derivatives might come with tax benefits. Remember to check your tax laws in your jurisdiction.
Before you take up this trading opportunity make sure you understand leverage and ensure you have solid risk management.
2. Hedging:
Hedging approves of offsetting some of your losses against your profits.
3. Long duration:
In CFDs, you can trade beyond regular trading hours, but take note of this, the market’s opening price could be different from its out-of-hours price or after regular trading hours.
4. Flexibility:
You can go long or short in CFDs, based on this. You can trade notwithstanding the direction the market is moving.
Final Thoughts
CFD is a complex financial instrument, trading CFDs can be highly profitable and volatile. From our research some trading providers claim their retail investors’ accounts lose 59%, 62%, and even 89%. These losses incurred are because of CFD leverage. Yet investors who take time to understand CFD trading, and put in place risk management measures are making money so you can too. Just ensure you understand how CFD works, how CFD profit and loss works, how to place CFD trades, CFD timeframes, and know the costs when you trade CFD. Happy trading.
