A CFD, or Contract for Difference, is essentially an agreement between two separate parties to settle the difference between the opening and closing prices of the contract when it closes. CFDs are classified as derivative products which allow you to trade on live market price movements but do not require you to own the underlying instrument that the contract is based on. You will find that CFDs can be used to speculate on the way that prices of certain markets will move in the future, which can be a very lucrative thing. If you want to make more money but don’t want to quit your day job, this is how you start trading CFDs.
Going Long or Short
When you are trading CFD you will be able to go long or buy if you have reason to believe that market prices will soon rise. You will also be able to go short or sell if for whatever reason you think that market prices will fall in the near future. If you believe that a company or market will soon experience a sharp decline in value just for the short-term, the best thing to do is to sell it right away so you can profit as much as possible.
Hedging your Portfolio
If for whatever reason you think that your portfolio is going to lost some of its value, you will be able to use CFDs to minimize the damage by short selling. There are actually quite a few different investors who still use CFDs to hedge their portfolio and to prevent an overall drop in its value. Using these financial instruments can be a great idea, especially in volatile markets.
Trading on Margin
Another important thing which you will need to know about trading CFDs is trading on margin. When you are doing this you will not have to pay for the full value of the transaction bur rather just a percentage when you are opening a new position referred to as “Initial Margin”. If a position happens to move against you and as a result reduces the balance in your account so that you have fallen below the required margin level, you will face what is called a “Margin Call”. A margin call will require you transfer additional funds into your account in order to keep your position open. In some cases though, a person is forced to close their position after getting a margin call.
Long vs. Short Trading
With CFD trading you will be able to go either long or short. With this type of trading you can do what is known as a long trade, which is when you buy an asset with the expectation that it will eventually rise in value, similar to purchasing a regular share. A short trade, on the other hand, involves selling an asset that you do not own in hopes that the price will fall, allowing you to buy it back later on. While it is true that short trading in the ordinary share market is nearly impossible, that is not the case with CFDs. It is just as easy to go short as it is to go long when you are involved in this type of trading, providing you with even more opportunities to earn profit.
Stop and Limit Orders
Another important aspect of trading CFDs which you should know about it stop and limit orders. A limit order is given at a price that is better than that of the prevailing market price. A stop order is used when the price is worse than that of the current market price. Because of the fact that it is possible to both make a lot of money and lose it as well, a vast majority of CFD providers allow for stop losses when a trade position is opened.
Trading CFDs can be highly lucrative, but it is important that you know exactly what you are doing. This type of investment can bring lots of profits but also has the potential for great losses as well. No investment is without at least some risk, and this is no different. Whatever you do, make sure to avoid any type of trade without doing your research first.
