The Beginner’s Guide to CFDs
What is a Contract for Difference?
A contract for difference, or CFD is a system of derivative trading. With CFD trading, you can speculate on the rising or falling prices of the quick-moving global financial markets, such as indices, shares, currencies, commodities, and treasuries.
How does CFD trading work?
When CFD trading, you aren’t buying or selling the underlying asset. Instead, you buy or sell a particular number of units for a specific instrument all depending on if you believe that the prices will go increase or decrease. For every point that the instrument’s price moves in your favor, you will gain multiples of the amount of CFD units which you have bought or sold. When the price moves against you, you’ll make a loss. Remember that your losses can exceed the amount that you deposited.
Short-selling CFDs in a falling market
CFD trading lets you sell short an instrument if you believe that it will fall in value, with the aim to profit from the predicted downward price move. If it turns out that your prediction is correct, then you can buy the instrument back at a lower price, and you will make a profit. If your prediction is incorrect and the value rises, you’ll make a loss. This loss can exceed your deposits.
Access to global markets
With CFD trading, you have access to a wide array of markets that otherwise wouldn’t be available to retail investors all on one trading platform.
CFD trading as a margined product
What this means is that you trade by paying only a small fraction of the total value of the contract. You can put up a small amount of money to control a larger amount, which can potentially magnify your return investment.
How to Choose the Best Online Broker for CFD Trading
Making the decision on which CFD Trading Broker is best, can be quite a daunting task. Since there’s is a lot of competition in the trading industry in addition to the numerous brokers to choose from, it is best to make an informed decision by comparing your options. The needs of a fx trader may change as you become more confident and advanced. However, for beginners, we have a few suggestions to keep in mind as you make your decision:
Every country has a regulatory body, such as the Financial Conduct Authority (FCA) in the UK. The governing body creates policies, rules, services and programs to help protect and maintain the integrity of the market, traders, investors and the brokers themselves. They help members meet legislative responsibilities. Because of potential safety concerns with regards to the deposit, you will want to be sure that your accounts are with a regulated trading firm.
While selecting the best CFD Trading Broker for you, it’s possible just to concentrate on CFDs. However, you should keep in mind there are many types of investment alternatives offered as well, such as Currencies, Forex (FX), Stocks, ETFs, or trading in futures or options.
Online trading takes place 24 hrs a day. Therefore, you will want to make sure that customer support is available at all times, should the need arise. Particularly for CFD trading beginners, you may find it easier to receive on the spot local UK phone support rather than waiting to receive answers via email. Check out the customer service center to see what type of customer service they provide, by giving them a call. Take note of the time required to receive the help you need. Also, look into the representative’s ability to answer your questions about the various features and trading basics.
An ideal broker should offer you either multiple account options or they should have the option to customize accounts based on your needs. Try looking for an online Brokerage that offers competitive spreads and has easy and straightforward deposits/withdrawals.
A CFDs trading broker should be able to provide you with the necessary information regarding the interest charged on leverage. Even though the interest rates do not change drastically between brokers, you may want to check out what they offer with regards to interest.
There are different online CFD trading platform types. Depending on what your needs are, you will want to see what each broker offers. If you do most of your trading on the go, you will want to make sure that the platform has a mobile option.
For more information on CFD Trading, please see our tutorial: The Basics of CFDs