Understanding CFD Trading May 23, 2017

What is a contract for difference? You would be surprised at how many people are not aware of these contracts. When you are engaging in a contract for difference, you are making a deal with a broker, where you are exchanging the difference in value of a currency, share or some type of commodity between the current time and the date of the contract ending. It is a very simple contract, where you are going to make money if you are able to successfully understand the direction where the market is going. So, how do these trades work?

The concept of cfd trading is very simple. Let us say that we have a stock in a major company like Apple or Google. If you are of the opinion that the share price of these stocks is going to rise in the next four months, you will enter into a CFD trade where you are predicting the rise in the share price. The other party will be betting on the fact that the share price will decrease, which would mean that you have to pay them the difference. But if you are right, you will earn the difference in the share price at the end of the contract.

When there is a difference in the share price or value of a commodity between the start and end of the CFD contract, one of the parties must pay up. And unlike other futures contracts in the financial markets, you are only paying through cash when you are adjusting the contract at the end of its cycle. Let us say that you are the person who made the correct call – and those share prices went up. Any money you are owed will be given to you in cash, not securities or some physical good.

Aside from the ability to assess whether the market will rise or fall, which is always appealing to investors, the high leverage that this market provides is also enticing. Let us say that you want to put a few thousand dollars into each CFD contract regarding the Apple and Google stocks. The good news is that you do not need to put all of that money up front, provided you are in good financial standing. You can get leverage that is anywhere from two percent margin requirements to 20 percent, depending on the broker you are doing a deal with.

cfd trading

The moment you are dealing with contracts where a high margin is involved, you need to tread carefully. It is very tempting to complete deals with a huge amount of value, but you must retain some caution. Yes, you can make good money with a small upfront payment, but you can also lose a lot more money than you put in. So, when you are coming to agreements for a CFD contract, make sure that you are not taking excessive risk. Play it safe with your first few agreements, and see how they play out. As you get more familiar with the trading method, you can take more risks.

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