CFD Trading All a beginner needs to know
Contracts for difference trade or CFD trading, is the trade of difference between the prices of two changed prices of a variable product, such as shares. The only difference is that you don’t own any physical stock of the shares but just be held responsible to own or pay for the difference in price of the shares between when you choose to engage and disengage. How does this work and how is it supposed to benefit you? Let’s take a look.
Why trade CFD?
CFD trading holds preference over the traditional stock trading in many ways. The people who trade CFDs consider this option over many other mostly because:
- It is possible to benefit from the changing prices of commodities that use a very little time span to change from one value to the other.
- International stock markets are available for trade with just one CFD account.
- It is possible to involve in trade for a contracted short period. This is very helpful when it comes to taken benefits of a value that has fallen down in position.
Where to start?
Trading CFD has to start from contacting a broker if you desire maximum profit from minimum input. This is not very necessary but let’s look at the example of winning a bid at the auction. Once you win the bid, you are supposed to provide a certain percentage of the bid upfront to assure everyone you are not just playing around in order to guarantee yourself what you won in the bid. A CFD broker actually lends you 90% of the amount once you make the 10% available.
What is short trading?
Imagine if you enter a town with numerous competitors selling sugar. The sugar is sold in cotton bags which are very expensive as a raw material. You buy 5 bags of sugar from a factory and sell them for the same value you bought them for (which will get you more customers and make you rise in the competition) and keep the cotton bags to sell later. If the market value of sugar falls, you lose from your trade but if the market value stays the same, you still benefit from selling the bags. Same goes for CFD short trading, except in reverse. You can trade your CFD to someone willing for a short period of contracted time. If the market falls, you buy your own CFDs in a lower value and wait for it to rise again. On the other hand, if the market rises, you are again obliged to buy your CFDs no matter how much at loss you are because you had a contract.
CFD trading vs. stock trading:
CFD and stock trading are almost similar except for 3 main differences.
- You can actually profit from a falling market by short selling CFDs.
- Commission rates tend to be lower than brokers of stocks.
- You can profit from a falling market by short trading CFDs.
When to start?
CFD trading is normally available for trade to you once you are above the age of 18.