A contract for difference (CFD) is a standard agreement between two parties. In most cases, they are buyer and seller who come into an agreement that the seller will pay the buyer the calculated difference between the current value of a specified asset and the contract value of such asset and in case the difference happens to be negative the buyer will pay to the seller.
CFD are financial derivatives products which allow traders to take advantage of price movement without owning the underlying asset that your contract is based. CFD financial markets offer prices on currencies, indices, commodities and much more of which traders speculate the future price movement of the underlying markets which keep rising and falling.
How can one start trading in CFD?
- Opening an account –CFD trading begins with creating an account in any online trading company just by filling in the online application form. After successful form submission, the underlying company will give a reply or verification via email address.
- Funding your Account- After the approval and opening of the account, a trader or an investor is required to transfer funds into the account to start trading. The fixed initial deposit and the minimum deposit is determined by the trading company you choose.
- Start trading CFDs- at this stage you as a trader is needed to log in to your account then select CFDs and start trading. On the account like CMC markets you can access streaming charts, news, analysis, price feeds and much more which will contribute to your decision when trading and reduce risk.
Risk management tools
- Trailing stops- Traders place a trailing stop to ensure trade moves on his/her favour and in case the market turns against his/her position then it automatically closes the business at the trailing stops new level.
- price alerts- Trader set price alerts which give notification when a market reach a stated buy or sell price. The best part of this is it keeps traders position open to give a chance for him/her to take action depending on the market price movement.
- Limited-risk accounts- In most cases this protects a trader from too much risk. It ensures that all the positions you open do not allow you to lose more that your initial deposit that is required to open trade. This measure provides a trader’s position is inherently limited to risks or give a guaranteed stop to save your asset.
- Guaranteed stop loss orders-This are the most efficient among risk management tools. They work in such a way that they close your trade at the set trigger value regardless of the market gapping and volatility.
Merits of CFDs
- Higher leverage- CFD market begins with a small margin requirement of 2% which means the required capital outlay is for a CFD investor, or a trader is less as compared to the traditional investor.
- Global market access- Most of CFD brokers offer products in the whole world’s major markets which mean traders can trade easily in any market that is open from brokers’ platform.
- A variety of the trading options- There is an index, currency, commodity and stock CFDs which traders of many financial instruments can consider it as an alternative.
- Very low fees charged if any for one trading in CFD. Many of the brokers in the market do not charge fees or commissions of any kind for one to enter or exit a trade. CFD also is not bound to any minimum amount of capital to be purchased on a day, and they can day trade if they wish with no restrictions.
A small change in the CFD market can have a great impact on a trader, and it’s advisable for a dealer to keep sufficient surplus funds to cover any adverse movements in the market. It’s vital for investors to note that price changes can easily be affected by factors such as earnings announcements, economic news, natural disaster or political changes. There are some other risks such as counterparty that may occur and mostly is as a result of trading with the under-capitalised or unregulated market. It’s important for any new investor to consider trading with a reputable, regulated and properly established counterparty. Furthermore, CFD is a perfect alternative for particular type of businesses or traders like short- and long-term for both potential and experienced investors.