A Contract for Difference, also known as a CFD, is a derivative instrument that is priced based on the underlying asset it represents. Some of the popular categories of CFDs are cryptocurrencies, forex, stocks, indices, and commodities. It is in fact pretty much every tradable financial instrument on the market nowadays.
Facts about CFD trading
CFD Trading It allows you to speculate on the price movement of your chosen underlying asset. When speculating, there are two possible outcomes – whether the price of the asset will rise or the price will fall. Make sure that you can benefit from the price movement whether it goes up or down because this is one of the advantages of CFD trading, you can profit regardless of the market movement.
In CFDs, you allow the exchange of the difference between your entry price and your exit price which is known as the spread. The losing party will pay the spread. It’s your call if you want to trade long or short. As you may have noticed, CFD is completely different from traditional trading or investing in that you can only profit if the price of the asset goes up.
One of the important facts about CFDs is the ownership of the underlying asset. Do not take possession of the assets you are trading in CFDs. For company stock, you will not benefit from dividends because you do not personally own the asset. But there is an opposite benefit to that. You only need to pay a portion of the real market price of the underlying asset and you will not pay its taxes because the asset is not in your possession. Despite this, you can speculate in the market using the full amount of the underlying asset and also make a full profit if your speculations are correct.
Find a reputable trading platform
The first decision you will make in CFD trading is to choose a trading platform. The trading platforms provide you with a comprehensive number of trading tools and educational materials to help increase your profits. Losing trades will still come and go even with a reputable trading platform. But you can have peace of mind that despite the losses, you can still skip every trade and make some profits, though.
When choosing a trading platform, check its credibility and license. Are they regulated by government agencies tasked with eliminating fraud and illegal activities in trade? Compare trading platforms with the trading tools they offer, resources, leverage ratio, margin, technical and fundamental analysis, security protocols and customer support.
Use leverage with extreme caution
Leverage is one of the main advantages of CFD Trading. This is why CFDs are so popular. As far as its advantages, there are disadvantages to using leverage which you simply cannot overlook. The leverage in CFDs allows you to open a much larger position using the capital that is not entirely yours. Therefore, if you lose on leverage trading, you will have to pay more than the money you invested.
Follow these CFD trading rules to become a profitable trader Last update: April 5th 2022 by