So, what are CFDs? A Contract for Difference (CFD) represents an agreement between two parties to exchange the difference in the value of an asset from the time at which the contract is opened, to when it is closed.
To better understand how to trade CFDs, a good place to start is by looking at traditional investing.
If you wanted to invest in a public company, you may choose to buy shares in that company. Similarly, if you wanted to invest in gold or oil, you could buy a bar of gold or a barrel of oil. Then you would wait for the price of your shares, gold or oil to hopefully increase, enabling you to sell the asset at a higher price and thus make a profit.
CFD trading works in a similar way – you open a trade on an asset at a certain price, wait for the price to either increase or decrease and then close the trade for a profit or loss on the difference.
One of the biggest differences between trading CFDs and traditional investing is that, with Contracts for Difference, you never take ownership of the underlying asset. Instead, a CFD mirrors the price of the underlying asset and, rather than buying that asset, you merely speculate on how its price might change.
To answer this question, it is best to look at an example. Let us say you wanted to trade CFDs on gold.
If you believed the price of gold might rise, you could open a buy, or long, trade in your CFD trading platform. If you opened the CFD trade when gold was priced at $1,500, and then closed the trade when gold hit $1,525, you would make a profit of $25 (not accounting for any trading costs).
On the other hand, if you thought the price of gold was going to fall, you could open a sell, or short, trade in your CFD trading platform. If you opened the CFD trade when gold was priced at $1,500, and then closed the trade at $1,450, you would make a profit of $50 (again, not accounting for any applicable costs of trading).
A demo account from Admirals is the perfect place for a beginner trader to learn how to trade CFDs or for an experienced trader to perfect their strategy! A demo account allows you to practice CFD trading in real-market conditions with virtual currency before risking your capital on the live markets. Click the banner below to open a free demo account today:
Whilst there are plenty of CFD brokers who would be eager to provide you with a long list of benefits, sometimes it can be hard to know what to believe – is everything that they are saying true or is it just another sales pitch? Keep reading for a balanced overview of the general benefits of CFD trading, after which we will look at some of the risks involved.
One of the biggest benefits of CFD trading is the use of leverage. CFD leverage allows you to access a larger portion of the market with a smaller deposit.
The amount of CFD leverage you will have access to depends on the instrument you are trading, your local regulator and your broker. For professional traders, you may be able to obtain leverage of up to 1:500. For retail traders, some instruments will allow leverage of up to 1:30.
So, if you have $1,000 in your account balance, and available leverage of 1:30, you can access $30 for every $1 in your account.
This means that, with a relatively small deposit, you can still make the same profits (and losses) you would make in traditional investing. The difference is that the return on your initial investment is much higher. However, CFD leverage must be used with caution, as potential losses are magnified to the same extent as potential profits.
One of the downsides of traditional investing is that you only make a profit when the markets are going up. However, trading CFDs allow you to trade both long and short, meaning you can profit in both rising and falling markets.
If a trader thinks the price of an asset will increase, They may choose to open a buy, or long, trade, in the hope that they will be able to close the trade at a higher price for a profit.
In a long CFD trade, the trader thinks that the value of an asset will increase. Therefore, they open a ‘buy’ trade at a lower price and then, hopefully, sell (or close the trade) at a higher price for a profit. If the market turns and the price decreases, however, the result will be a loss.