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CFD trading is the activity of trading contracts for difference with a broker. CFDs (Contract for difference) are derivative products, in which you can trade on the difference between a certain asset’s set starting value and its closing value. By using a contract for difference, which is basically just a contract between a buyer and seller that specifies a certain purchase price and allows for profits or losses based on the change in the price of the underlying asset during a specified time frame, a trader can participate in a financial market with a smaller initial investment.
Since their introduction in the early 1990s, CFDs have become increasingly popular as investors appreciate the lower capital requirements. They allow investors to participate in markets they may not have had access to previously because of large margin requirements or regulatory issues. CFD trading gives traders the ability to go long or short on an asset, , and in the U.K.,traders can avoid the stamp duty since CFDs are derivative products.
When trading CFDs you predict your chosen asset’s movement in the market. As you do in traditional trading, you Buy when your prediction is a rise in value and Sell when your prediction is a fall in value. This does not mean you are buying or selling the asset because when investing in CFDs you are investing in your right to earn from the asset’s movement not the asset itself. However, it is important to remember that you can lose your investments should the asset price move in the opposite direction from your prediction.
For example:
You’ve read a report on Apple that indicates the stock will plummet in the next few days. You then enter our trading platform and watch its behavior on our live, real-time graph and decide you agree.
Do you Buy? Or Sell?
To Buy would mean the stock needs to go up higher than the Buy price.
To Sell would mean the stock needs to fall lower than the Sell price.
Has your asset risen by 2 pips beyond the predetermined criteria, or 1? If you predict a sharp change in the asset’s movement during the trade’s time frame then trading a CFD might be your better option. However, there are risks involved, and the potential losses should also be examined.
Risk warning:
Contracts for difference (‘CFDs’) is a complex financial product, with speculative character, the trading of which involves significant risks of loss of capital. Trading CFDs, which is a marginal product, may result in the loss of your entire balance. Remember that leverage in CFDs can work both to your advantage and disadvantage. CFDs traders do not own, or have any rights to, the underlying assets. Trading CFDs is not appropriate for all investors. Past performance does not constitute a reliable indicator of future results. Future forecasts do not constitute a reliable indicator of future performance. Before deciding to trade, you should carefully consider your investment objectives, level of experience and risk tolerance. You should not deposit more than you are prepared to lose. Please ensure you fully understand the risk associated with the product envisaged and seek independent advice, if necessary. Please read our Risk Disclosure document.