Home Finance CFD Trading – An Idiot Proof Guide

CFD Trading – An Idiot Proof Guide


What are CFDs?

The difference between how a trade is actually initiated and how it is terminated is known as the contract for difference. Thus, a CFD is an instrument that is tradable and it reflects the fluctuations of the asset which lies underneath it. It shows how profits and losses can be realized when the underlying asset shift in relation to the original position taken; however, the asset is never actually owned by the client. The contract is essentially between the customer and the broker. The popularity of CFDs has soared in recent years because of the trading advantages it possesses.

CMC Markets have a wonderful website, which will guide you through how to trade in and use CFDs correctly and professionally. If you are relatively unknowledgeable on the subject, but are interested in some of the mechanics in relation to how CFDs work, then pay their website a visit.

CFDs seem to offer the trader a wonderful opportunity of trading at any time during the day with minimal fees attached, but be aware that spread costs may hamper any potential profits. Nevertheless, for those in the know, CFD trading, if navigated properly, opens doors in the stocks and shares world that other trading doesn’t.

Advantages of Using CFDs

Higher leverage: CFDs give a much better leverage than normal trading. Traditional leverage in the trading market can be quite high, but with CFDs the margin requirement can be as low a 2%. However, these rates can rise up to 20%, dependent on the market. Lower margin specifications mean less capital to be paid by the client and it also means greater potential profits. But you have to remember and increased margin can mean increased losses.

Global market access from one accessible platform: Many CFDs provide brokers with products that are tradable in all of the world’s major markets. Essentially, this means that traders can easily sell and buy on the open market from their broker’s chosen platform.

Less shorting rules of borrowing stock requirements: Many markets have rules that forbid traders/brokers form shorting at particular times because they need the trader to borrow the instrument beforehand or have alternative margin specifications for shorting as opposed to the other option of going long. The CFD markets is not bound by shorting of borrowing tock rules. Thus, an instrument can be shorted at a time that is suitable for you, and because their is no ownership of the asset, the costs for borrowing or shoring are nil.

Professional execution with no fees attached: CFDs brokers provide many of the same orders as your high street brokers. These include the following methods:

– stops
– limits
– contingent orders (e.g. ‘one cancels the other’ & ‘if done’)

There are a few brokerages that provide guaranteed stops and those that do this charge a fee or manage to get their revenue through another stream – either way it costs. There are very few fees linked to CFD trading, if any. Brokers trading in CFDs do not charge any hidden commission fees or any fees related to the initiation or termination of a trade. The broker makes their money from a request: making the trader pay the cost of the spread. Thus, to buy a trader must meet the asking price and to go short (sell), the trader must be go with the bid price. Dependent on fluctuation within the underlying asset, the spread may be wide or narrow, but it is almost always a fixed spread.

Things To Be Aware Of When CFD Trading

CFD trading may initially appear lucrative and attractive, but there are certain disadvantages. Having to foot the bill for the spread on entries and exits eradicates potential money made from any minimal moves. Moreover, the spread will also affect winning trades by tiny amounts (over the cost of the actual stock) and it will also mean losses are increased (over the cost of the actual stock). While stocks leave the trader open to fees, tighter regulation, unforeseen commissions and money specifications the CFD market has its own idiosyncratic way of lightening traders profits through the incorporation of larger spreads.