CFD Trading – what you need to know

CFD or Contract for Difference is a derivative product whose price is derived from the stock or index on which it bases its actions.  They are very similar to regular stocks but in order to trade in them you need just a small amount of money.  There is no ownership of physical stock in the transaction and there is no contract note given as you seen with regular trading activities in the share market. The trading happens in the difference between the price when you enter the market and the price when you leave it. Different types of people get into CFD trading. Trading in it is done by investors, intraday traders, swing traders, long, medium and short term trader, even those who are new to the stock market.

Benefits of CFD

People indulge in CFD trading in order to take advantage of the short term movement in share prices. CFD offer high leverage which enables them to earn a good profit. They can also trade in it to hedge their share portfolios. The lower commission rates in this trading are quite attractive. The kind of profits gained when markets fall is very good giving excellent returns. With a single account they can trade in various global financial markets which give them exciting opportunities to make a lot of money. Anyone who is over the age of 18 can trade in CFD. When the market is going through short term volatility, investors hedge their portfolios through CFD.

In CFD trading you can make very efficient use of capital money. Trading can be done using just margin, so you do not have to put money that amounts to the full value of a position. As all your money is not tied up in a single transaction, you can wisely invest it in other ways taking more advantage of the opportunity to make profits. Another thing is that you can trade on shares whose value is rising as well as falling and benefit through both trading opportunities.

Risks of CFD

Though CFD trading is quite attractive, you should also be aware of the risks involved in it. It is possible than you lose more money than what you have in the account. Though the winnings are high, the same can be said for losses. You have to use risk minimizing methods to avoid succumbing to them. When you sell short, there is an exposure to risk. The time to trade is short which can be tough. There are two ways in which you can trade in CFD which are direct market access or market maker model.  You should talk to traders to find out which method they opt and why, so that you can decide which one to choose.  When starting out in CFD trading it is best to select CFD instruments that are most traded because they offer the best prices and can be easily liquidated. The most popular CFD are the FX CFD and following them are indices, commodities and sectors.

About CFD Trading :

CFD Trading is a part of Trading Lounge ,which is an online trading analysis and education service that offers services such as Day Trading, Trading Strategies, Technical Analysis, and How to Trade advice by a reputable and experienced trading coach. TradingLounge.com.au was started by  Peter Mathers in 1982 to meet the  growing demand of accessible and sensible education in online trading.