What is CFD Trading?
CFD trading refers to speculating the future price of various assets on one trading platform.
Understanding CFDs
CFD traders don’t have to own these assets. Instead, they only profit from predicting the future price of these assets. Therefore, the value of these contracts doesn’t include the asset’s value. They only consider the change in price during the contract’s duration.
Advantages of CFD Trading
Leveraged Trading
Compared to traditional trading, CFD trading has a higher leverage. You can trade on margins, which will give you a higher leverage. Low margin requirements mean more profit with less capital. You don’t have to invest the total amount of the position.
Diverse Asset Classes
CFDs don’t restrict you to a single financial asset class. These contracts let you benefit from trading cryptocurrency, ETFs, and stocks.
Short-Selling Opportunities
The many short-selling opportunities that come with CFDs have played a major role in their popularity. With short-selling, you can earn even when the market price drops. Long-term investors use the short-selling capability as a hedging tool.
Risks of CFD Trading
Leveraged Losses
When the market goes against you, the higher leverage can magnify your losses. Therefore, you have to trade carefully and make sure you have a reliable money management system.
Market Volatility
If the assets are experiencing extreme volatility, the ask and bid prices can be quite significant. This means that profiting from small market moves can be impossible. So, the number of winning trades can be low, resulting in high losses.
Counterparty Risks
CFD traders execute their trades via brokers who act as counterparties to the trades. This exposes your trades to the brokers’ credit risk. This means that if your broker goes bankrupt, you may suffer some losses.
How CFD Trading Works
The fact that you’ll be dealing with several assets grants you more trading opportunities. You can either go long or short and benefit from upward or downward price movement.
Opening and Closing Positions
This trading method includes two trades. The first one opens a position, while the second one closes it via a reverse trade. If the first trade is a long position, then you’ll have to go short to close it.
CFD Pricing and Spreads
The price of trading these contracts includes a financing cost, commission, and the spread. Financing charges apply when holding positions overnight. You may have to pay a commission when trading shares but not for trading commodities and forex.
Funding and Margin Requirements
The CFD brokers tend to set the margin percentage that you must pay to access a particular market. This can vary from broker to broker or market to market. These requirements will restrict your freedom of investment, which will affect borrowing terms.