Trdaing CFDs: an Introduction

A contract for difference (CFD) offers traders and investors an opportunity to profit from the price movement of an underlying asset without owning it. This type of online trading enables traders to take advantage of the value fluctuation for a range of fast-moving global financial instruments such as shares, indices, commodities and currencies. Trading CFDs is becoming more popular as it provides traders with many advantages.

The most important benefit of this type of trading are low brokerage fees associated with it, mainly because you trade the difference between the purchase sale prices of an asset. Often only margin spreads are charged which are part of any CFD broker’s trading policy.

However, like any type of trade or investment, wrong market forecasts can lead to loss of money, and one should be aware of the risks involved in CFD trading. We strongly suggest trading on a demo account before investing.

How does it work?

With top brokers you will be able to trade over 1000 instruments. When you are trading CFDs you select the amount of CFD trades and your profit will rise or drop depending on the market direction. For example, if you think the price of oil is going to go up then you could place a buy trade of 5 contracts at the price of 5325. If the market rose 30 points to 5355 and you closed out your position, you would make a $150 profit, 30 times the 5 contracts that you bought. For every point the price of the instrument moves in your trade’s favor, you gain multiples of the number of CFD units you have bought or sold. For every point the price moves against, you will make a loss. Please remember that losses can exceed your deposits. ​

Costs of CFD trading

When you are trading online there are fees you need to be aware of. The most common one is called a spread, which represents the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favor before you start to make a profit, or if the price moves against you, a loss. We recommend you always choose a top broker that offers competitive spreads.

There are CFD brokers that add holding costs, commissions and market data fees. You need to carefully read terms and conditions to be fully aware of the contract terms. However, any additional fees, except the spread, can lead to costly trades.

By trading CFDs, investors can benefit from the advantages associated with owning an asset without holding that financial instrument. Traders can use these contracts to take long or short-term trading positions based on the underlying asset’s price movements. Alternatively, they can use these contracts to hedge their portfolios, helping to manage different kinds of risk such as downside risk.

This is a sponsored press release and does not necessarily reflect the opinions or views held by any employees of The Merkle. This is not investment, trading, or gambling advice. Always conduct your own independent research.