What is CFD trading and how can it work for you? In this article you will be presented with the basics of online CFD trading, its pros and cons, and some tips to become a successful CFD trader.
What is CFD?
You may have found yourself with the following problem. You want to buy 100 shares of a stock worth £36.24. In order to do the transaction you need £3,624. Supposing you go to your broker and he asks a margin of 50%, you would be asked to lay out £1,812 to do the trade, and this is only for one trade.
Trading Contracts for Difference (CFD) allows you to trade with the movements that the stock or asset does, and not with the asset itself. The variation between the point where you enter the trade and the point where you exit it is the CFD. So you make a contract with the broker and your profit or loss will be based on how the underlying asset moves.
3 Advantages of Online CFD Trading
There are several advantages when you engage with online CFD trading. One is that the leverage they offer is higher since the margin required is not 50%—as it is for a stock—but as low as 2%. In the case we mentioned above, for example, it would mean that you would only need £72.48 instead of £1,812, which is a substantial difference. It is true, though, that you could be required up to 20% margin, it depends on the asset.
Another advantage is that you can get your hands on the market. It is easier to access any market because the majority of CDF traders offer products in the most important markets in the world.
With CFD you can reduce trading costs. With any other type of trading you would have to pay the broker. In the beginning, CFDs brokerage costs were zero. Sadly, nowadays brokers may charge around 0.08%. But that is still low-cost, isn't it?
Where is the Catch?
The broker makes his profit from the spreads that you have to pay, both when you enter and when you exit the trade. So say goodbye to making profit from tiny moves.
Another downside is the lack of regulation in this industry. That means that you will have to trust your broker based on his past performance and current financial position.
And, as we have mentioned before, the leverage is higher but this is a double-edged sword. Higher leverage can be translated as higher profit, but also as higher loss.
To summarise, if you are—or are planning to become—a short time-frame trader, Online CFD trading certainly seems to be just what you have been looking for. In any case, make sure you don’t let your emotions lure you; your hunch may give you the odd win, but in the long run, logic is a better tool to use. So be mindful, and carefully plan every step you take.