What is CFD Trading?

Trading in CFD (Contracts for Difference) is increasingly common among professional investors, but anyone can attempt it. The bulk of online trading sites sell their clients contracts for differential trading. It is a potentially high-risk trading technique, but you will minimize the risk exposure as long as you grasp how CFD trading performs.

Selling Short and Long in CFD

CFD Trading is a type of derivative trading in which you speculate on the rise and fall of securities prices. A variety of securities may be exchanged, from equity shares, foreign currency, gold and silver commodities, and indices. Trading CFDs offers links to more than 10,000 financial exchanges, and you do not need much money to start trading because any deal you create is leveraged.

The distinction between investing in CFDs and buying/selling a bond is that you do not own the real asset. For starters, instead of purchasing or selling actual gold, you merely speculate about whether the price of gold is going to go up or down.

How does trading CFDs online work?

You should open a CFD (Contracts for Difference) Trading Account with a broker if you are adequately informed of the dangers and wish to start trading online. It is free to open an account, but each exchange would be a payment using either a spread or commission.

Some brokers have reasonably small minimum contract sizes for new consumers, but you would be expected to set down a margin deposit. You’ll notice that trading CFDs can be an efficient way to obtain exposure to stock markets with less money until you start trading (but more risk).

risk of CFD trading

Before making any investment choices, please contact a licensed advisor.

CFD Trading and Gold Prices

Using gold as an example, we understand that in Quarter 4 of  2017, demand for gold started to decline, so prices decreased accordingly. Prices have fallen to less than $1,250 per ounce, and some experts expect that gold could drop much more by the end of 2018, possibly below $1,150 per ounce. In part, the anticipated decrease is attributed to increasing U.S. investment bond rates and substantial U.S. tax cuts scheduled for 2018.

Gold prices may go in any direction, so it pays to watch economic data, particularly U.S. interest rates, since they directly affect gold spot prices. You can go “long,” which implies purchasing if you decide that gold prices would increase. But if you suspect that it is more probable that gold rates would decline, you can go “short,” or sell.

Traders who accurately guess price trends earn a profit depending on multiples of the amount of sold CFD units. However, you can incur a loss if you get it wrong and the market movement moves against you.

Risks of CFD Trading

The attractiveness of CFD trading is that only a tiny fraction of the entire valuation of the commodity you exchange has to be spent. Trading margins may be as small as 1 percent, but it will only entail a $200 deposit if you take a stake worth $20,000, which is not a hefty sum for an armchair trader.

When you have a profit margin, the cash you receive would be dependent on the asset’s maximum worth. This ensures that your earnings will comfortably surpass the amount of the tiny margin deposit needed to keep the CFD. However, if you have it wrong and fail, you might wind up costing more than your original expenditure, on the other side. Therein lies the primary risk of CFD trading. You may also be subject to holding costs if your positions are still open at the close of trading – i.e., held overnight. There will also be commission fees, depending on which trading platform or broker you use.

CFD trading can be an advantageous – and profitable – strategy if you are looking to hedge investments in the underlying shares and assets the CFDs represent, especially if the market is volatile. Of course, you can also trade CFDs outright, on their own. It’s not required that you already have other investments and solely use CFDs as a hedging investment. Just make sure that you fully understand the risks involved before you begin trading CFDs.