Trading Contract For Difference is something you shouldn’t underestimate. Just like any other trading, you need the right knowledge to function properly in the market. Amidst all the questions that surround CFDs, take a look at the most common onesthat weigh huge importance.
What is CFD Trading?
CFD stands for Contract For Difference. It is another type of trading wherein a contract is being agreed upon by the trader and the broker. The trader will predict the movement of the stocks and the losing party will have to pay for the difference between the opening price and the closing price. It is strongly recommended to understand the basics of trading before you join the live market. CFD is highly volatile and you cannot guarantee continuous wins all the time.
Another thing about CFD is that the trader doesn’t own the stocks. Is it good news or a bad one? The negative impact of not owning the stocks when trading CFDs is that you don’t have company shares and therefore, you don’t have a say in the company where you brought the stocks. But the bright side is that, when you trade stocks on CFD, you don’t need to pay the full amount of the asset which is quite expensive, especially for newbies. Additionally, you are exempted from tam obligations like stamp duty.
Why is it better to trade CFDs instead of buying stocks in a traditional way?
One of the greatest advantages of CFD is the use of leverage. Because of leverage, many traders are drawn to CFDs because they can trade without paying the full amount of the underlying asset. So when you want to trade stocks through CFD, you just need to pay a portion of the full actual amount of the asset and you can start opening a position in the market. If you get lucky and you win a game, you will receive the full amount of profit even though you only paid a portion of the full amount of the underlying asset.
So, what’s the catch? Just as leverage is the greatest advantage of CFD, it is also tagged as its deadliest disadvantage. As mentioned above, you can get the full amount of profit even though you only paid a portion to trade. However, if you lose, you will also need to pay the full amount of the underlying asset to the broker. This means that you can lose more than you invested.
What can I trade in CFD?
There are a lot of instruments that you can trade with CFD. Some of the most popular instruments include indices, commodities, stocks, cryptocurrency, and Forex. There is a wide number of assets to choose from. The good thing is, that you can trade these instruments on a single platform. You don’t have to transfer from one platform to another just to trade multiple assets.
Is CFD trading risky?
All trading types are risky. After all, you cannot profit if you don’t risk. This is the same with CFD trading, you have to be mindful of your trades and examine each indicator to identify the right entry and exit points. You can also use some risk management tools like stop-loss order to mitigate the loss despite the market volatility.