For those traders who are finding various methods to invest in the financial market, trading CFD is an attractive option. It is a way to trade effectively without purchasing the assets or any associated stock. But, if you are hesitating just because you don’t know anything about CFD trading, then don’t worry the article will provide you with everything you need to know about CFD trading.
Definition of CFD Trading
Generally, when you think of different investments, you either think of non-stock assets or various methods of accessing stock markets. If we consider the former, commodities often come to mind are crude oil and precious metals such as gold and silver or perhaps the trade in currency.
It is an alternative option and is an acronym for the contract for difference. The contract means an agreement between the seller and buyer to exchange the difference between the closing and opening price of the security being traded. When one trades through CFD, he is buying a contract based on the assumption that the security at hand will fall or surge. If a trader thinks that asset value will surge, he chooses to “purchase” and if he thinks that it will decline, he “sells”.
Choosing Your Market
There are virtually many assets that can be traded through CFD trading. These typically include commodities, digital currency, stocks as well as forex pairs. A given CFD broker provides trading in all these markets with their advanced trading platforms.
101investing is a famous and well-regulated firm providing CFD trading in wide areas. The reason for choosing 101investing are:
1) CySEC regulation
2) 250+ CFDs on assets
3) Zero commission
4) 10,000+ markets
5) Leverage 1:30
6) Minimum pip of 0.03
7) Meta Trader 4
Understanding Leverage in CFD Trading
Leverage is the crucial part of trading CFD though it is hard to define this term precisely. The idea behind trading CFD with leverage is that a trader can access more considerable funds than they are putting in. A Trader’s significant deposit provides him access to a larger amount of money for carrying out the more massive trade if he desires. It reflects that a well-planned investment can indeed generate a considerable profit.
Advantages of Trading CFDs
It provides various advantages over the conventional forms of investment. Hence, it is popular among today’s traders. These advantages include:
1) Trade falling and surging markets
With derivatives, investors can speculate on both declining and surging markets. It means that there are a wide variety of trading opportunities and profit can be easily made by selling and buying the contracts for difference on a broad range of financial tools. For example, when a trader purchases stocks or shares of a firm, profit can only be harvested if they surge in value. On the contrary, while trading CFD, an investor can earn profit by selling these stocks and shares if he expects a firm’s stock value will fall.
2) Trading CFD on margin
By using financial leverages, traders can trade a larger set of markets by depositing a smaller initial amount. Essentially this leverage works as a loan which investors take from their respective broker. Thus, by enabling them to manage larger positions (in CFD) on the financial market by investing a tiny amount of their capital (reserved as margin). The feature market CFD trading is cost-effective and more accessible than any other investment method.
3) No duty on stamp
Another reason which makes this trading even more cost-effective than other types of investments is that, while trading CFD, traders aren’t compelled to pay any stamp duty. As CFDs are popular derivative tools, a trader is not really taking ownership of the underlying security and hence, stamp duty does not apply to trading CFD.
Although there are various advantages of it, a trader must also investigate the disadvantage and the risk associated when trading these financial derivatives. They are as follows:
1) Leverage can sometimes act as a double-edged sword
Though trading on leverage or margin can enable the trader to open a larger CFD position in the market, along with this, it brings various levels of risk with it. Tiny price movements can put an investment in danger if the investor enters into an over-leveraged or undercapitalised market. Thus, it is essential that before trading CFD, an investor fully understand all the concepts and risk management strategy.
2) Costs can even grow over long-term
It is a cost-effective way, but if a trader does not appropriately manage its position, then costs can gather over time. Traders looking forward to opening long-term must be aware of the additional charges, such as overnight swaps.