Considering taking up CFD trading?
Contract for Difference (CFD) is a common derivative form of trading that presents you with an opportunity to speculate on price changes of speedy moving financial market indicators. These include share indices, commodity prices, and currencies. CFD allows you to trade on margins. For example, you can be able to buy when you expect the price of a commodity to go up and sell when you expect the price to go down. Here is vital information worth considering as you take up CFD trading.
1-The Working Principle
Firstly, CFD trading does not allow you to trade an underlying asset such as physical share or commodity. CFDs global markets are offered so that you can buy and sell based on speculation. The way you see the market is very important as it will help you decide on what to and when to trade. Each time the price index favours you, you stand to gain on several units sold or bought. On the other hand, each time the price index is against you, you stand to make a loss.
Secondly, CFDs products are leveraged commodities. What this means is that you should only deposit a small fraction of the total value so as to open a market position. For example, CMC Markets, an online trading platform, insists on the importance of balancing the margins. Even though trading magnifies your returns, you should also expect the losses to magnify. If the losses outweigh the deposits, then you should be worried and take urgent measures.
2-Costs involved in CFD Trading
The following charges are very crucial when taking up CFD Trading:
a) Commissions: This applies to shares. You are required to pay extra commissions each time you trade the CFD shares. It’s important to research on the online platforms about the commission index. It’s also crucial to understand the market trends. Many times, you will be charged a commission of less than $7 on shares.
b) Spread cost: In every market, CFD trading requires you to pay spread charges. This is the difference between the selling price and buying price. Each time you get to trade, you quote a buying price and when selling, you are expected to indicate a selling figure. It is understood that the narrower the spread, the less the chance of price favouring you. In this case, you tend to take longer before earning returns. You have to take spreads that are competitive so as to maximise the chances of making gains.
c) Data fees: In many markets, you are expected to subscribe to the relevant date charges. Most markets ask you to do this when trading or just accessing the share price information.
d) Holding costs: At the completion of a successive day, holding charges will apply on your commodities. The holding charges may be good or bad depending on the market direction. When the market is positive and you are able to earn returns, then you shouldn’t worry about the holding cost. On the contrary, if the trend is negative, then you should worry.
3-CFD in Relation to your Physical Portfolio
If you happen to have invested in a portfolio of shares with a broker that you are not confident with, you can hedge in CFD. This will lower your chances of making losses. CFD allows you the opportunity to short sell the same shares and make good returns. Many investors around the world are using this strategy, especially in volatile markets.
The above information is necessary when taking up CFD trading. Whatever the reason, you have to get full information on the trade you are partaking. You should understand the benefits and risks of taking up such an investment vehicle. The opportunities underlined in CFD trading are many and you can only realise this if you dare invest.