CFD trading is a popular form of trading amongst retail traders with many new accounts that are opened being CFD ones.
There are a lot of benefits to trading CFDs, but it also comes with risks.
In this article, we will take you through everything you need to know about CFD trading. Scroll down to find out:
A CFD, or Contract For Difference, is a form of trading that allows a trader to trade the price of a financial instrument, without owning the underlying asset. It is essentially an agreement between the trader and the CFD broker to exchange the difference in value between the opening price and closing price of the position.
One important point to note is several countries do not allow CFD trading, with the main one being the USA.
CFDs work by permitting traders to trade the price changes of numerous financial market assets, entering a position based on whether they think the asset will rise or fall in price.
Fundamentally, CFDs are used by traders to speculate if the price of the underlying asset will go up or down.
If the CFD buyer predicts correctly and the underlying asset price rises, the value of the CFD also increases and they could then sell the position for a profit.
The difference between the buy price and sell price of the CFD is the profit (or loss) from the trade. This is then settled in the trader’s account with the broker.
Conversely, if the trader thinks the underlying asset will fall, a sell position can be entered and then a purchase is made to offset the trade. Once more, the difference between the prices is the gain (or loss), which is cash-settled via the traders account with the broker.
Margin is a portion of your account balance that the broker sets aside to allow you, the trader, to trade. For example, if you wish to trade a EURUSD position, to be able to take that trade, the broker will set aside a certain amount of money in your account that cannot be used until the EURUSD position is closed.
Leverage, which I am sure many of you have heard of, is the ability to use the broker’s funds to increase the size of your trading position. It allows you to trade positions sizes larger than what would be available in your trading account.
Using leverage can help to increase account sizes fast, but it can also result in extremely large losses, so you have to be careful when using leverage. Use it to help increase your profits, but make sure you are not over-leveraged.
A CFD spread is the difference between the price you can buy a CFD or sell a CFD. The two prices are sometimes referred to as the bid and ask. The spread can also be referred to as the bid-ask spread.
For example, if you are trading the EURUSD and the current price is 1.1210, and there is a two pip spread. The price you will be able to buy the EURUSD CFD at is 1.1211, and the price you will be able to sell it at is 1.1209.
Each trading day closes with the end of the New York trading session, (10 pm London time). If you still have positions open in your account, CFD brokers charge what is known as a holding fee. The direction of your trades, at the end of the trading day, will determine whether these costs are positive or negative based on set calculations for each broker.
These calculations include variables such as the number of units held, the opening trade price, the holding rate, and the broker’s currency conversion rate. The resulting amount will then either be credited to your account or debited from it.
With Contracts for Difference or CFDs, traders (and maybe even longer-term investors) can trade on the changing value of an asset, rather than buying or selling the asset outright. The difference between the open and closing trade prices are settled in cash. The physical asset is not actually owned if bought or delivered if sold.
There are several benefits to this:
While CFD trading carries many potential rewards, some risks come along with that. It is essential to be aware of the risks associated with CFD trading before you start. For example, trading with increased leverage can lead to increased losses.
Some of those risks are:
Then the Swiss National Bank unpegs the Swiss franc from the euro and the price collapses from 1.20 down to 0.96, a 41% drop. Stop-losses are there to protect you, but if there is an enormous move that happens so fast your SL may not trigger quick enough and will get you out a lot lower than you expected (slippage), leading to an enormous loss in the EURCHF case. A case like the EURCHF one is extremely rare, but it is important to note that big swings in price can lead to larger losses than expected.
Now you have got to grips with CFD trading, let’s give you some tips to help you on your way.
Trading CFDs is a straightforward process, and as mentioned at the beginning of this page, it is prevalent amongst traders.
To trade CFDs, you will need to:
Contracts for Difference or CFDs are a popular way of trading and offer traders and investors easy entry to a wide range of assets and the ability to trade with high leverage and low margin requirements.
However, it is always important to remember the risks associated with CFD trading so that you limit the potential for losses on your account.
Remember, the majority of investor accounts lose money so it is important to do your homework.
There are restrictions in place in Europe to protect traders, but you must manage risk.
If you are looking for a reliable CFD broker to trade with, then check out our CFD broker reviews.
A lot size is the size or quantity of a financial instrument that you wish to buy. In CFD trading it will be the size of your trade. For example, one lot in gold is equivalent to 100 ounces. In CFD trading, you can adjust the lot size to increase or decrease the value per point of movement.
You are able to trade a variety of different types of CFDs from spot, futures and options markets.
There are many different CFD markets that you can trade on from stocks, forex, cryptocurrencies, commodities, and bonds. As long as the broker you are with offers those options you will be able to trade them. Compare the best CFD brokers.
No, CFDs don’t have any expiration date. You can hold positions for as long as you want. However, if held too long holding costs will start to accumulate and could make a dent into any potential profits you make.
CFD trading profits are not liable for stamp duty, however, they are considered a capital gains tax asset and are liable for capital gains tax. The tax benefits are not the same as when you trade on a spread-betting account.