Contract For Difference (CFD) is very popular nowadays, be it experienced or newbie investors. Anyone can try this trading style and you can gain profit from it if you know how to use it. Though there are currently a lot of trading platforms that offer Trading CFDs, it is important to consider that this strategy is very risky. However, if you understand and know how it works, you can somehow minimize your exposure to these risks.
Understanding CFD Trading
CFD is derivative trading where you can speculate on the movement of the financial market, whether the prices go up or down. With CFD, you are capable of dealing with several assets such as commodities including silver and gold, stock shares, and foreign exchange. What’s making CFD very popular is the ease of access to 10,000 markets all over the globe and its leveraged trades wherein a huge capital is unnecessary.
CFD and buying/selling of security offer a huge difference. With CFD, you don’t buy or sell actual gold. You only speculate on its price, whether it goes up or down.
How To Trade CFD
The first thing that you need to if you decide to start CFD trading is to open a trading account online. Before anything else, you need to ensure that you know the risks of CFD and prepare a risk management plan as much as possible. There are no charges when opening an account, but every time you trade, you will be paying for a commission or spread.
Pick a company that offers a low contract size for their new clients. But most of the time, margin deposits are required upon the start of your trades. Once you tested this trading strategy, you will know that this is the most effective way to gain exposure across the global financial markets without using a lot of capital.
What are the Risks of CFD trading? How To Handle It?
One good thing that attracts investors to use CFD is its required small amount of investment while gaining the full value of your traded asset. For instance, you take a trading position which is worth $20,000, the trading margin is as low as 1%. An initial deposit of $200 will only be required, an amount not too huge for a regular investor.
For-profit margin, the amount that you earn is solely based on the entire value of the asset. This goes to show that the profit can exceed easily to the small margin that you deposited to hold the CFD position. But the risks come in. If you happen to take a loss, you will blow up your initial investment and even more. This is considered the ultimate downside of CFD.
Nonetheless, trading CFDs is a very profitable and useful strategy if used properly. You can also use CFD trading outright as it does not require any other investments and only want to have a hedging investment through CFD. One important thing to do is to fully understand all the risks involved in CFD before opening an account and investing your hard-earn bucks.