CFD trading is a very popular way of derivative trading. CFD traders speculate on the price changes of a certain trading instrument such as Forex, Commodities or Indices. Trading CFDs doesn’t involve buying or selling of the underlying asset, so there is no physical delivery of a CFD.
In other words, CFD is a contract between a buyer and seller and it is short for Contract for Difference. The difference part refers to the price of an instrument at the opening and the closing of a trade.
What are the pros and cons of CFDs?
Before the introduction of CFDs to retail traders in the late 90s, traders were tied to the asset value. This means if the asset they own decreases in price, they would lose money and the only option for them was to sell the asset as soon as possible to minimize the loss or accept the loss and hope for a recovery in the future.
CFDs enables traders to benefit from price changes in either direction. By going short (selling), traders can profit even if the price is moving down. Going long, on the other hand, means buying and requires prices to move up in order to generate profit.
Let’s say you decided to trade CFDs for Facebook shares. You believe Facebook stocks will sharply fall in price today. Knowing that Facebook shares will fall, you can quickly deposit funds into your CFD trading account and open a sell position (go short) in the Shares market. When the Facebook shares drop in value as you predicted, you will profit – even though you do not own any Facebook shares on paper!
However, if Facebook shares gain value instead, you will lose. Because CFD prices go parallel with underlying markets.
You should be aware that leverage magnifies both gains and losses and this fact carries with it the risk of losing more than your initial investment. 70% of retail investor accounts lose money when trading CFDs. Another risk for traders is market volatility. There are many factors that cause sudden and unpredictable changes in the markets. However, with proper risk management, you can protect yourself from these risks.
Self-education is crucial when it comes to CFD trading. You must learn about CFDs before making an investment. By learning more, you will be able to develop better risk management skills.
InvestCore presents the best educational materials so that you could prepare for the trade more effectively if needed. We also offer you expert advisors and risk management to increase the chances of earning profit. Just open an account, and we will help you to get acquainted with the world of trading.