How To Trade CFDs: A Brief Guide

A CFD or Contract for Difference refers to an agreement, reached at by two parties, whereby the difference between the opening and the closing price of a contract is exchanged. It allows the trader to trade on the price movement on several financial assets like the commodity futures and the various liquidity assets. Here, you are basically trading on live market prices, without holding the underlying asset, which forms the basis of your contract. You can trade on a wide gamut of financial markets featuring currencies, shares, stock indices among others. A CFD is often considered to be a flexible trading option when compared to the traditional trading platforms within the financial market. Based on your position as a trader, you can actually make profits even if the prices go up or down.

How do you trade with the CFDs?

The Contracts for Differences are generally traded similarly like that of traditional shares. Just as in the case of shares, the prices quoted by variant CFD providers are same as the underlying market price and you can trade on any quantity just as you want. The providers will charge you a commission on the trade executed by you. The value of the transaction will simply be derived after multiplying the total number of the Contract for Differences that you have bought or sold with the market price.

• Each of the assets that you are going to trade has a buy or sell price. This buy or sell price is also known as a bid or an offer.
• If you speculate that the market is going to fall then you can sell your asset at bid price by “going short”
• On the other hand, if you feel that it’s going to rise in the near future then you can buy at the offer price, thereby “going long”.

In short, if the market moves in the direction as predicted by you then you’re expected to generate more profits. Needless to mention, that if the market moves in the opposite direction, you might end up losing. The extent of the win or loss depends on the length of the time till you want to keep your trade open.

Yes, your power of prediction will play a key role in governing your fate in cfd trading. If you predict that a company will lose its value in the short term then you can utilize the CFDs to sell it today, which will result in the rise of your profit in line with a fall in that price. On the other hand, if the market does not move as you had predicted, then you are going to suffer losses.

You need to deposit only a miniscule amount of the trading price. For instance, if you are willing to trade some 5000 shares of a company, you  would have to deposit only a miniscule percentage (say around 5% or so) of the total amount unlike in case of traditional shares where you have to pay up the entire price for all the 5,000 shares.

Since, the Contract for Difference is a leveraged product, you must understand the risk it entails. Just as you’re required depositing only a tiny amount of your overall market exposure you may end up losing big (much more than your deposit) if the market moves against your predictions.