CFD Trading Guide For Beginners and Professionals

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What are CFDs? Contract For Difference is a derivative product that allows investors to speculate on the price of an underlying asset. For new traders, their concern when it comes to the entry cost is little to nothing. It is even available for trade online. The downside is that there are complicated instruments that you need to tackle, therefore, you have to educate yourself first about CFD trading.

But there’s nothing to worry about. This article will cover everything about CFDs, how it works, their benefits, and the risks associated with every trade.

What are CFDs

Contract for Difference is an agreement of two parties that the losing party will pay the difference of the entry and exit price. To have a good understanding of CFDs, it is important to take a look at traditional investing.

For instance, if you want to invest in a company, you have to buy shares of that company. Just like when you want to invest in oil or gold, you also have to buy gold and oil. After that, the waiting game happens. You have to wait for the price of your company shares to rise so you can sell it and make some profit.

Similarly, CFD works the same way. You have to trade an asset at a particular price and you need to wait for its price to increase or decrease, according to your speculation before you close the assets and make a profit or loss.

If you are wondering about the difference between CFD trading and the traditional form of investing, it boils down to the ownership of the underlying asset. Because in CFD, you can speculate on the price of the underlying asset without actually owning it.

How Do CFDs Work?

To properly address this question, you have to check out this example. For instance, you want to trade gold on CFDs.

You are expecting the price of gold to rise so you open a buy position in the CFD trading platform. By opening a CFD trade for gold at the price of $1,500, you can close it when the price hits $1,525. You can then make a profit of $25 for that open position.

Meanwhile, if you are thinking that the price of gold will fall, then you can sell it or short trade it on the CFD trading platform. Opening a CFD trade with gold at $1,500 and then closing it on $1,450, you can make a profit of $50.

The Benefits

Understanding what are CFDs is knowing their benefits. There are a couple of benefits to this type of investing. Some of it were leverage, trading long or short, a variety of tradable markets, flexible trading hours, short-term trading, expiration dates, and costs of trading.

Leverage is one of the major benefits of CFD trading. The use of leverage is advantageous to new traders because they won’t have to put up with huge trading capital to trade the asset that they want. With leverage, you can gain a larger market exposure just by paying a small deposit. But for new traders, it is advisable to take on smaller leverage just to minimize the risk.

For instance, if you want to invest in a company, you have to buy shares of that company. Just like when you want to invest in oil or gold, you also have to buy gold and oil. After that, the waiting game happens. You have to wait for the price of your company shares to rise so you can sell it and make some profit.

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By Daniel Lincoln

Daniel Lincoln is the founding member and Manager of Multiple Websites for First SEO Paper, also the owner of high-level quality sites focusing on General Categories only.

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