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What is CFD Trading?

2 min read

For active investors, trading stocks has one major disadvantage – going short is not that easy. For private investors, is involves selling shares that they do not already own. Nonetheless, with CFD trading, going short is as easy as going long.

What are CFD’s?

CFD stands for ‘Contract forDifference’ which is a popular type of derivative instrument trading. It enables the investor to speculate on the rise or fall of prices of fast-moving financial instruments or markets such as indices, shares, commodities, treasuries, and currencies.It is ideally an agreement between two parties to exchange the difference between the open price and the close price of the contract, at the closing of the contract, multiplied by the specified number of shares under the contract. As such, the CFD itself has value – the product of the number of shares within the contract and the price of the underlying shares.Read more about trading CFDs here.

How CFD Trading Works

With CFDs, you do not actually buy or sell the underlying asset (such as a physical currency pair, share, or commodity). You only buy or sell a given number of units of the underlying instrument based on your thoughts on whether the price will go up or down. For every value point the price moves in your favor, you will be gaining a multiple of each CFD unit you have bought or sold. And you will make a loss for every point the price moves. Keep in mind that here, the losses can exceed your deposits.

The main advantage with CFD trading is the investors don’t have to pay the full price of the underlying value of the contract, and only need to deposit some collateral (defined as margin), generally 20% of their total investment. This way, when the trader wants to buy a CFD contract that amounts to $10,000 worth of shares, the minimal amount required would be $2,000.This article provided by: Investing for Retirement