If you are still looking to know about Contracts for Difference, chances are, you are new to the market and still hesitating if trading is best for you. Questions like, “What is CFD trading?”, “What is the difference between CFD trading and Futures?” or “Is it profitable to trade CFDs?” – these questions might be continuously bugging you. Fortunately, this article will give you a glimpse of what you can expect if you trade CFDs.
What Does CFD Mean?
CFD is Contract For Difference. It is a derivative product that allows the use of margin and leverage on each trade. With leverage and margin, you are given greater exposure to the market such as cryptocurrency, Forex, gold, commodities, and stock indices. Trading CFDs mainly involves the buying and selling of units from the primary asset. Traders speculate in the market if they think that the asset will rise or fall in value.
What are Short Trading and Long Trading?
Deciding to go short or long solely depends on your personal action as a trader. CFDs allow price speculating wherein you can either buy or sell in the market. If you believe that the asset’s value will rise, you can buy more CFDs. This move is called ‘going long’. But when you sell this asset, it is referred to as ‘going short’.
What is Leverage in CFD Trading?
As mentioned above, one of the benefits of CFDs is the use of leverage. Leverage allows the trade of assets on a larger scale without the need to deposit a huge amount of funds. Leverage in CFD will only require you to pay a portion of the asset’s original price. For instance, you can pay as little as 5% as an upfront payment or also known as margin.
With the capital that you have on hand, you can diversify by investing in different markets. By that, higher profits are expected.
What is Margin in CFD Trading?
Margin is connected to leverage. Margin is the partial amount that the trader needs to pay to open a trading position. It represents the portion of the actual size of the trading position. Two types of margin are available in CFD trading – the Maintenance margin and Deposits margin. With deposit margins, you can use it to open positions, and maintenance margins are useful in minimizing the losses in every trade.
What is Hedging CFD Trading?
Hedging can be used in Contracts for Difference. For example, if you think that some of your shares will suffer a dip in value, you can minimize the future losses if you go short and sell your assets.
What are Spread and Commission in CFD Trading
There are two quotes in the price of Trading CFDs – the buy price and the sell price. The buy price is the price needed to open a long trading position in CFD and the sell price is the amount used to open a short trading position in CFD. The difference between these two, the buy and sell price, is known as the spread.