You may feel a little overwhelmed if you’re new to the CFD trading world. Don’t worry – you’re not alone. We’ll assist you with everything you need to know to start. We’ll cover the basics of CFD trading, including how to open a trade and what factors to consider when making decisions. We’ll also give you tips for avoiding common mistakes beginners make. So whether you’re just starting or looking for a refresher course, this guide has everything you need to get started.
What is CFD trading, and how does it work?
CFD trading stands for “contract for difference”. It’s a type of derivative trading that allows you to speculate on the price movement of financial markets without owning the underlying asset. If you think the price of gold will go up, you could open a CFD trade on gold. If the price of gold does indeed rise, you will make a profit. However, if the price falls, you would incur a loss.
When you open a CFD trade, you decide whether you think the asset price will go up or down. You then choose how much money you want to invest and enter into a contract with your broker. The contract specifies the number of units of the asset you buy or sell and the price at which the trade will be settled.
Your profit or loss is calculated using the following formula:
(Closing price – Opening price) x Number of units traded. For example, let’s say you open a long CFD position on gold for $1200 per ounce with a contract size of 100 ounces. It means you are effectively buying 100 ounces of gold.
The value of your trade would be: $1200 x 100 = $120,000
If the price of gold rises to $1210 per ounce when you close your trade, your profit would be: ($1210 – $1200) x 100 = $1000
On the other hand, if the price of gold falls to $1190 per ounce, your loss would be: ($1190 – $1200) x 100 = -$1000
As you can see, your profit or loss from CFD trading is based on the underlying asset’s price movement. You don’t own the asset, so you don’t have to worry about storage or security. Plus, you can trade a wide range of assets, including commodities, indices, shares and currencies.
The benefits of CFD trading
Firstly, a CFD is a leveraged product, which means you can trade with a small amount of capital and gain exposure to a large market. It allows you to make more profit (or loss) than if you had invested the same amount of money in the underlying asset.
Another benefit of CFD trading is that you can trade on margin. It means you only need to put down a small deposit – typically just 5% of the total value of your trade. So, if you wanted to buy $10,000 worth of shares, you would only need to invest $500. It allows you to make a much larger profit (or loss) than if you had invested the total amount.
How to get started with CFD trading
Now that you know the basics of CFD trading, let’s look at how to get started.
First, find a reputable broker; view company website for more info. There are numerous online brokers to pick from, so it’s essential to compare their fees and features before deciding. You should also ensure they offer a platform that suits your trading style.
Once you’ve found a broker, you’ll need to open an account and deposit funds. The amount of money you need to deposit will depend on your trade size and the leverage you’re using.
For example, if you’re trading with a 1:10 leverage and want to buy $10,000 worth of shares, you would only need to deposit $1,000. However, if the market moves against you and the value of your trade falls to $9,000, you would need to deposit an additional $900 to keep your position open.
You’re ready to start trading once your account is set up and funded. Now choose the asset you want to trade, decide whether you think the price will go up or down, and enter into a contract with your broker.
If you’re new to CFD trading, practising with a demo account is a good idea, and it will allow you to get used to the platform and build your confidence before putting any real money on the line.