CFD or Contracts for Difference is increasingly popular among professional traders but everyone can really use it. If you check some reputable online trading platforms, you will see that CFD trading is widely offered, just like Forex trading. It may be a high-risk investment but if you try to understand the process, you will minimize the risk and achieve great results.
Going ‘Long’ and ‘Short’ in CFD trading
CFD is a derivative instrument that lets traders speculate on the rising and falling of the asset’s price. There are a lot of assets you can trade in CFD and you can pick whatever you’re comfortable with, be it indices, foreign exchange, stocks, and commodities. There are 10,000 global markets accessible in CFD . And since trading on CFD is leveraged, you are not required to pay a huge capital to open an account.
There’s a huge difference when it comes to trading CFD and security. In CFD, you don’t have to actually own the underlying asset, which is good because you don’t have to spend so much on the capital. With a minimum deposit, you can start to speculate in the market whether the price of the underlying asset will rise or it will fall. All you need is to predict its movement and you will benefit from it, whether it rises or falls.
Trading CFD – The How To’s
Being aware of the risks and finding a reliable broker, you can now start trading CFD online. As for the opening of an account, it is totally free of charge but you will have to pay for a commission or spread whenever you try to enter a trade.
There are CFD brokers that offer a low minimum contract size towards their new clients but a margin deposit is needed. After starting to trade, you will understand how effective CFD can be in gaining exposure to the market without having to exert a lot of capital. As long as you remain mindful of the risks and use risk management properly, there’s nothing you really have to be afraid of.
CFD Trading Risks
Now that we have tackled all the good things about CFD, here comes the risks married to this trading style.
Traders tend to get attracted to the fact that they can trade just with a minimum deposit and still get the value of the underlying asset. That sounds advantageous on the trader’s side. Trading margin in CFD can also go as low as 1% which means that taking a $10,999 trading position will only require you a deposit of $100, something that isn’t a huge amount for starters.
With a profit margin on hand, the profit you earned will come from the full asset value. That being said, profits can exceed the small amount of margin that you’ve paid in order to hold a position in CFD. When things get wrong and you are on the negative side, you will suffer so much and end up losing even the initial investment that you had. This is considered the primary risk of CFD trading.