A CFD (Contract For Difference) is an instrument that mirrors the value of another (underlying) asset and when you make a trade in a CFD then that position will take on profits and losses that will be in line with the price move of that underlying asset.
If for example you place a buy trade in a CFD and take on a long position, then a subsequent 5% increase in the price of the underlying would be reflected as a 5% increase in the price of the CFD position you are holding.
There are other interesting features of CFDs but the first and most fundamental step into understanding how trading them works is to appreciate trading a CFD, in terms of profit and loss at least, is based on the performance of the underlying.
Looking at the actual mechanics of the process can be beneficial. CFDs as a tradeable instrument are set up by brokers who upon receiving an instruction to buy or sell from you, the trader, look to go into the market to trade the underlying. When you buy or sell a CFD on the broker platform, the broker matches that position in the market. This means access to a broker account is a prerequisite of trading CFDs and as the brokers have extensive market access it also means they, and therefore you, can access a wide range of financial markets and utilise opportunities to trade across them using CFDs. A cursory glance down the side bar of one of the Demo Accounts on offer at one of the broker platforms shows: Currencies, Commodities, Energy, Metals, Shares, Indices, ETFs, Bonds and Blends are all available to trade.
CFD trading allows you to take on Long or Short positions in the market. Opening a trade on the broker platform is carried out by the click of a mouse and from that point the position will be shown in your account and a live price feed will show changes in profit and loss relating to that position. You can carry out subsequent trades that increase or decrease the size of the position and when you ‘close out’ the position by taking the size of your holding in that instrument back to zero the P&L relating to the trade will be shown as realised P&L in your trading cash account.
Being aware of the respective advantages and disadvantages of the different broker platforms can help you choose which platform is best for you and your type of trading. The research and analysis tools and general user interfaces are just two ways they tend to vary from broker to broker and in the same way that you might find you are well suited to trading particular markets you might also find a particular broker platform provides a good fit to those different instruments so it’s a good idea to carry out your own research into what is on offer.
Dashboard showing Daily Candlestick Price Chart for Copper CFD on Market.com.
Dashboard showing Hourly Candlestick Price Chart for Bitcoin CFD on IG Trading Platform.
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