Home Money & Finance The Complete Guide to CFD Trading

The Complete Guide to CFD Trading

by Olufisayo
CFD Trading

Today, global financial markets are open to anyone. With the right platform and intermediary, you may buy and sell a wide array of assets. Aside from currencies and shares, traders may capitalize on derivatives. CFDs are increasingly popular tools, as they generate profit based on price movements.

It is estimated that 15+ million people engage in online trading across the world. A few decades ago, the marketplace would only welcome banks, hedge funds, and other institutional players. Not only is it possible to buy shares online, but you may also invest in instruments that are purely virtual in nature. Such are Contracts for Difference.

New Generation of Financial Tools

As a trading instrument, CFDs are linked to underlying assets. There are quite a few options available. The fundamentals, however, are universal. Through the derivatives, you may profit from changes in prices for:

  • commodities (e.g., crude oil, wheat, gold, etc.),
  • currencies (e.g., EUR/USD),
  • cryptocurrencies (e.g., Bitcoin),
  • market indices (e.g., FTSE 100).

In the days of yore, investors and traders were obliged to own the instrument they traded. CFDs eliminate this need. With a Contract for Difference on wheat, no actual pounds of the commodity will be transported. Instead, you will only be focusing on the price chart. Without physical assets, trading is easier, more varied and much more accessible.

Example: Stocks vs. CFDs

Businesses issue shares as part of initial public offerings. These securities are released on the stock market where they are bought by traders and investors. In some cases, the profit is two-fold. On the one hand, you receive a steady income in the form of dividends. At the same time, you may sell the asset back for profit.

Owners of shares are also owners of a certain stake in the business. Physical securities belong to the previous generation of finance tools but they are still widely used. The main barrier to entry is usually the capital requirement. Physical stocks require much bigger deposits than their virtual alternatives.

Digital Tools: the Big Picture

As the term suggests, a Contract for Difference is a special form of agreement between a trader and a provider. The subject of this paperless contract is the price movement for an asset. This form becomes even more popular among the traders in Asia. The fact that such digital tools are gaining traction through Forextime thailand is only natural. More and more traders decide to use it for their convenience.

Today, consumers are used to having their needs satisfied through the Internet. From shopping to paying the bills and employment, the range of remote services is extensive. The advent of digital derivatives was therefore predictable. Without physical assets, trading is done from the comfort of your home.

CFDs on Commodities

These are goods whose price is set by the market, regardless of individual producers. For instance, CFDs for crude oil are tied to its global price. The typical contract size is 100 barrels. However, no physical barrels of Brent or WTI are moved. The same logic applies to all other alternatives, such as wheat or precious metals.

Thanks to the concept of leverage, a trader may buy more than their own capital allows. This is known as ‘trading on margin’. A common requirement for retail traders is 10%. This means that a volume of $10,000 may be bought using just $1,000 of your own money. This makes trading accessible to those who would not afford it otherwise.

Importantly, profits are not limited to upward trends. If you expect the value of CFDs to fall, you may sell short. This way, you trade the derivative while its price is still high, and protect yourself against losses. The tactic will also allow you to buy back more of the same CFDs for less.

CFDs on Indices

Indices reflect the performance of securities on the largest global exchange. The value of FTSE 100, SP 500, Dow Jones, and any other index rises and falls depending on the stocks included. This means hitting zero is highly unlikely as prices are cluster-based.

If you were dealing with separate shares, your profit or loss would rely on the performance of one company only. The more diversified the selection – the lower the overall risk. With CFDs, this is combined with favorable leverage and the entirely digital nature of the tool.

A Word of Caution

It is vital to remember that CFDs are complex trading instruments. Thus, they are hardly suitable for players with no prior experience. Rookies may transition to CFDs once they have grasped the fundamentals of Forex trading. Any reputable broker warns clients of inherent risks and offers learning material (tutorials, articles, etc.).

For skilled traders, the benefits are clear. Contracts for Difference are widely used for portfolio diversification. Due to their purely virtual nature, they are easier to trade than old-school shares. Moreover, the range of underlying assets is very diverse.

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