What Is CFD (Contracts for Difference) Trading?

Do you want to increase your profits as the market rises or falls? CFDs are an exciting opportunity for taking advantage of market trends.

Have you heard about CFD trading and wondered if it’s for you? We have everything you need to know!

In this post, we’re going to share with you how CFD trading works, its advantages and disadvantages, and how you can get started.

About CFD Trading

CFD stands for a contract for a difference. Rather than buying into the underlying asset of a company’s stock, this financial derivative is an agreement with a broker. This means that you can speculate on the markets, whether they rise or fall.

CFD trading usually happens with an online provider like eToro. You can exchange the price difference of your asset between when you opened the contract and when it closed. You only put up 20% of the cost for full market exposure.

CFD trades often enjoy lower fees and commissions. And in the UK, they are exempt from stamp duty taxes. Don’t forget to check out our review of the best cfd trading platforms UK.

How CFD Trading Works For You

CFD trading is all about buying and selling contracts at a difference and profiting based on predictions. You need to know whether the market will rise or fall because you can profit either way. But you need to predict ahead of buying.

This is different from trading stocks in which you buy into an asset. With stocks, you need the asset’s stock to increase for you to profit. CFD trading is different because you can trade long or short.

What’s the Difference Between Long and Short CFD Trading?

Long or short CFD trading refers to whether you’re buying and speculating that the markets will rise or fall. A long position means that you are betting on a rise in profits, so you’ll gain when there’ an upswing in the market. Trading a short position is when your contract profits from the markets falling, so any fall in price is money in your pocket!

Here’s an example. Let’s say you want to open a long position on Facebook shares. You decide to purchase 100 CFDs at $160 with a total value of $16,000. If Facebook appreciates to $170, you make $10 per share and a total of $1000.

The Pros and Cons of CFD Trading

Pros:

  • Leverage Options. Although you only put up 20% of the costs, your profits will be based on the full market value. That means huge profit when you do well.
  • Profits from Market Rises and Falls. With long and short positions, don’t wait around for the perfect stock. You can make money when you know an asset will fall!
  • Instant Order Execution. Open and close contracts with ease. Make decisions about your assets that will take effect almost instantaneously.

Cons:

  • Leverage Trading. How can leverage trading be both a pro and con? Well, while your profits are magnified, your losses will also be bigger when you’re wrong about your speculating. While stocks will rarely fall to zero, you can truly lose everything you invested with a bad leveraged position.
  • Risk of Overtrading. Because you can open and close CFDs so quickly, you may fall into the mistake of overtrading. Make sure you truly evaluate each CFD you open and make an informed decision for when to close.

The Risks of CFD Trading

Now that you have a better understanding of CFDs, it’s time to decide if it’s right for you. We think that you’ll enjoy the instantaneous orders of opening and closing contracts to speculate when the market rises or falls. This can lead to bigger profits from smaller investments, which you can’t get from stocks!

But it’s also important that you are aware of the drawbacks. Watch out for leverage trading from a poor position as it can lead to losses of your investment. And avoid overtrading by making informed decisions carefully.

One way you can avoid the loss of your investment while also CFD trading quickly and easily is to use eToro. This platform allows for unleveraged trading so that you can minimize losses. You can also avoid financing fees while getting real-time alerts to avoid risks.

Conclusion

If you’re ready to start CFD trading, there’s no need to hesitate any longer on potential profits. You can start trading on an online platform with low investments and see where your investment takes you.

Free up some capital and diversify with CFD trading for a new financial investment experience.

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