CFD Trading for Beginners
A Contract for Difference (CFD) is an agreement between two individual parties, a broker and a trader, to trade the value of an asset between opening price and closing price. There are more than 4,000 markets for CFDs trading.
CFD trading allows you to predict financial markets, such as commodities and bonds, shares, indices, and currencies, and make a profit from the prediction.
If you are a beginner looking to dive into CFD trading, this beginner’s guide to CFD trading is designed to help you understand what is CFD trading, how CFD trading works, and why seasoned investors prefer it. Read on to find out more about CFD trading.
A Beginner’s Guide to CFD Trading
How CFD trading works
As a CFD trader you will not own any commodity, index or share, instead you are required to open a CFD position after which you need to put in a small deposit. This deposit enables you to buy whichever amount of CFDs you want to trade.
If the price of your preferred commodity goes up, the seller reimburses the difference between the buying price and the new price. If the price goes in the down, you have to pay the difference between the new asset value and the buying price.
For example, if a trader thinks the price of commodity A will go up (go long) and places a buy trade of 4 CFDs at 4,200. If the market rises 50 points to 4,250, and the trader closes his position, then the trader makes a profit of $200, 50 times the 4 contracts. If the market goes in the opposite direction (go short) then the trader pays the difference and loses $200.
Making A Profit From Falling Markets
As a trader you can make money from on a falling market. For example, if you believe the price of oil will fall in value and you open a sell position at 3 CFDs at 4,120. If the value goes down by 70 points and you close your trade, you will make $210, that is 3 contracts times 70 points.
Hedging Against Volatile Price Activity
When there is unpredictable movement in price, traders will find ways to protect their assets from this volatility. Hedging protects the assets of a trader against uncertain market environments. ¬Hedging is a CFD trading strategy that enables traders to offset losses and to lock gains without having to close their position.
A point to note is that when you hedge your stock, you will not accrue any gains.
Why CFD Trading Is Ideal For You
Seasoned investors prefer CFDs because of its flexibility, hedging tools, and margin trading. When it comes to investing your money, CFD is a solid choice because:
- You can be as passive or active as you would want.
- Your have access to more than 4,000 markets so you can easily diversify your portfolio.
- You get to make a decision on what you want to invest in, from shares to indices, to commodities and bonds.
- You get to choose whether to go long and go short on your assets.
With CFD trading you can either make profits or losses, but you can also hedge your assets against a volatile market. As a beginner the above guide will help you navigate easily through CFD trading.