CFD trading is one of the most misunderstood types of trading available today. Unlike stocks or Forex, CFD’s (contracts for difference) are a whole new method that takes awhile to learn properly. This can be a great addition to the portfolio of the skilled investor once all the particulars are sorted out since this method can bring a handsome return on investment.
A newcomer would be wise to find out how this system works before entering this market however. There are a great many rewards offered by a speculator skilled in this method, and he can easily bank a large portion of his portfolio with CFD trading.
Probably the most key element in understanding how CFD trading works is to realize that the costs associated with hedging, going long or short on a trade are substantially cheaper using this method. To be more accurate, a buyer and seller agree to a contract where the difference in price between the time the stock is bought is compared to when its sold. This amount is paid out through a binding contract — essentially a CFD. An investor in this market looks at how trades are going for a particular day. He then decides whether to buy or sell stock at a pre-determined amount some time during the trading session. At some point, a trade is finalized by determining the net cost. This is the value of the actual number of shares involved times the difference in value from opening to closing on that day. So a profit is realized with a long position if the stock is at a higher position at close. However if the ending price is lower, and the seller has a short position, he will get paid by the buyer.
CFD trading has some similarities with stocks, but it also compares somewhat to the commodities market.
It can vary greatly as regards to a speculator’s particular methods and willingness to risk capital. This is not something for the weak of stomach since markets can change on a whim. Most of the traders in this market are of the short term variety, and they are looking for a short term gain before moving on to something else. There are other factors that have to be looked at when trying to compare CFD to any other type of speculation.
The CFD market is run mainly on margin. Thus the total value of the trade does not have to be available, only a small amount is necessary to deposit in an account. CFD prices are also quite liquid since this market is quite dynamic in its price flows. There are also very low costs in order to make a transaction in the CFD market as compared to stocks. A CFD trader can also sell short, effectively hedging his portfolio. A short term decline can realize a profit in this way while not destroying the current portfolio.
There are some disadvantages also with the CFD trading market, and the first is leveraging (i.e. overextending). While it can be used for profits, sometimes this will backfire causing losses to multiply. There is also the higher risk involved with short terms trades. The market can be extremely volatile at times so while the margin is only a small amount of the stock value, it can be lost quite readily along with more money if the market goes the wrong way.
But many investors find online CFD trading easier than most others, including Forex. This is mainly due to the fact that different currencies are harder to keep track of as the market can fluctuate due to current events.