A CFD or a Contract for Difference is an agreement made between two parties to trade the difference in price of a security from the time the contract is opened and to the time it is closed. CFD trading has become one of the most popular avenues for traders to exchange stocks, commodities, currencies and indices over the Internet.
CFD trading is also popular due to how it lets traders capitalize on the constantly changing prices of an asset. Traders can take short positions when they feel that the asset’s price will go down and they can take long positions when they think the price of the asset is going to rise.
How to Trade CFDs
CFD trading is perfect for people who like to go along with market trends and try to take advantage of rising or falling market. Traders can open a buy position or go long if they think the price of an asset will rise. On the other hand, they can open a sell position or go short if they think the price of an asset will fall.
When the contract closes and the value of the underlying asset rises, the seller must pay the difference between the current price of the asset and the price when the contract was made. However, if the price of the asset goes down at the contract’s close, the buyer must pay the difference to the seller.
CFDs can also be leveraged, which enables traders to increase their exposure to the market for only a small part of the capital traders would usually require. CFDs have become one of the most popular methods of trading because of their flexibility. The ability to be able to leverage CFDs, along with being able to go long or short, is what made CFD trading so attractive for traders.
When it comes to CFD trading, there isn’t much that traders should look out for when it comes to risks that isn’t already in other existing trading methods. Just like with any forms of trading, you stand the risk of losing whenever the market moves in a way you did not expect it to. Traders looking to get their feet wet with trading CFDs may also have to consider other costs apart from any possible losses such as taxes, account management fees, commission to brokers and other additional costs.