Getting Started with CFD Trading: Everything You Need to Know
Contract for differences (CFDs) can be a profitable enterprise for traders. However, while CFD trading can prove lucrative, it’s not without risk. When it comes to CFD trading, you’re speculating on financial commodities. As such, there are no guarantees and the margin for loss is considerable.
To novice investors, CFDs can prove daunting. This is understandable. CFDs are complex forms of investment that are largely unique compared to other products. CFDs are highly leveraged and tend to be sold across multiple markets. An experienced trader can land huge profits when these markets are moving in the direction. However, an inexperienced trader can quickly accumulate devastating losses. Looking for more insights into CFD trading? Our guide outlines everything you need to know.
CFD Trading for Beginners
Unlike other forms of trading, CFD investors never actually take ownership of an asset. Instead, CFD trading sees an investor and a financial institution entering into an agreement. The key clause of this agreement is that a buyer must pay the value difference of an asset to the seller at the closing time stipulated in the contract.
When it comes to CFD contrasts, asset values aren’t taken into account. Instead, it’s price changes that are focused on. Because of this, exchanges aren’t typically involved with CFD trading. Is CFD trading better than spread betting? Beginners can struggle to wrap their heads around CFD trading, but with the right approach, it can prove incredibly rewarding.
Due to the nature of contract for differences, this advanced style of trading is rarely explored by beginners. Those doing the investing never take ownership of securities or physical goods. Instead, revenues are determined by price changes. In some cases, this is relatively easy. If you have little trouble getting to grips with gold cash price charts, speculating on the price of gold should be straightforward.
Where is CFD Trading Allowed?
Although CFD trading is becoming increasingly popular, many countries don’t allow it. It’s currently banned in the United States. CFD trading is currently allowed throughout Europe, Canada, and Australia.
Even in countries where CFD trading is allowed, most regulators consider it a high-risk venture. As such, restrictions vary wildly around the world. In Australia, CFD trading is allowed, but it is subject to robust regulations that limit potential losses for investors. Regulations also prohibit brokers from offering incentives to investors.
The Benefits of CFD Trading
One of the main advantages of CFD trading is that you benefit from higher leverage than when trading in traditional commodities. Although maintenance margins have increased in recent years, they’re still incredibly low. These low requirements mean investors don’t have to rely on substantial starting capital to kick things off. The downside of higher leverages is that, occasionally, investors have to contend with increased losses. However, don’t let this dissuade you. There are many other positives to CFDs that make them an enticing trading prospect.
No Minimum Amount Requirements
Unlike day trading, there are no minimum requirements involved when it comes to CFD trading. In the case of day trading, restrictive limits and capital requirements are often par for the course. Although most CFD trading opportunities require a modest minimum investment, you’ll rarely encounter trading limits.
There Aren’t Any Fees Involved
Commission and fees regularly eat into a trader’s bottom line. With CFD trading, fees aren’t much of an issue. Generally speaking, CFD brokers will recoup their costs by traders covering the spread. The spread can vary dramatically and is ultimately determined by the asset volatility. However, fixed spreads are easy to find, making them an enticing option for budget-conscious traders.
Access to Worldwide Markets
If you’ve embraced the world of investing as a full-time enterprise, CFD trading is the way to go. Most brokers will allow you to access investment products from a variety of international markets. This makes 24/7 trading incredibly accessible.
Short Selling is Allowed
In many markets, short selling is prohibited. You’ll find no such restrictions holding you back when CFD trading. Unlike other markets, you can short-sell CFD products at any time. Furthermore, as no asset ownership is involved, you won’t have to worry about borrowing costs.
Multiple Trading Avenues
Some people would have you believe that trading opportunities are limited when it comes to CFDs. This simply isn’t the case. Speculators can find CFDs attached to everything from foreign currencies to stocks. If you’re looking to engage with varied financial products away from conventional exchanges, CFD trading should prove a good fit.
The Drawbacks of CFD Trading
CFD trading isn’t without its drawbacks. The main issue faced by traders is that they have to pay the spread. For some, this is a bitter pill to swallow and makes CFD trading cost-prohibitive if you’re someone who only makes marginal moves. The spread also puts a slight dent in potential profits. Furthermore, the spread will add to any losses incurred. Ultimately, spread costs largely replace conventional commission, fees, and minimum capital requirements. As such, they’re an acceptable evil. However, there are other things you’ll need to bear in mind before deciding on whether CFD trading is right for you.
Significant Risk is Involved
CFD trading isn’t for the investing novice. It’s a fast-paced alternative to conventional trading and requires an in-depth understanding of markets. Because of this, there’s substantial risk involved. You’ll need to constantly monitor market data to ensure your margins are protected. Furthermore, it’s almost to mitigate losses. If your venture is heading for a loss, there’s not a lot you can do about it.
The risk factor of CFD trading is a double-edged sword. On one hand, the profit potential is enormous. The flip side is that potential losses can be devastating. Stop-loss limit orders aren’t readily available from every broker, but they can help protect your investment.
CFD Trading is Largely Unregulated
This is another major drawback to CFD trading. The industry as a whole isn’t subject to the same rigorous regulation as other investment avenues. With little government and financial authority regulation in place, you’ll need to ensure you’re dealing with a credible CFD broker. Due diligence is vital here.
Take the time to read through the terms and conditions. Establish what fees and commissions are involved. Research the level of customer support you can expect to receive should you run into any trouble. Only deal with an established CFD broker that’s been operating for some time. This not only suggests they’re more reputable but means there will be plenty of reviews from existing investors to reference.
Is CFD Trading a Safe Option?
If you’re generally risk-averse, CFD trading probably isn’t the right investment path for you. There are several benefits to this style of investment, but there are just as many drawbacks to consider. Liquidity risk and market uncertainty are two major factors you’ll want to think about. What’s more, a lack of industry regulation means investors have few protections in place. Additionally, you’ll need to constantly monitor prices to ensure you have a sufficient margin to make a profit or, at the very least, end up with an acceptable loss.
Can you make money with CFD trading? The short answer is yes. However, CFD trading is far riskier than other forms of investing and requires advanced strategy. The majority of CFD traders have extensive experience in other trading markets.
There are many reasons why would-be investors might want to consider CFD trading. However, inexperienced investors need to bear in mind that a contract for differences is distinct from conventional trading. A CFD involves an agreement between two parties, typically an investor and a broker. Rather than owning an actual asset, an investor secures revenues dependent on price changes attached to that asset.
There are many benefits of CFD trading. For starters, it’s relatively affordable. Investors can profit from an asset, without having to fork out the outright cost of the asset. CFD trading is also relatively accessible. Leverage is also higher than conventional trading. This can mean increased returns. If you’re looking to access international markets, CFDs are an attractive option. CFD brokers also generally offer a range of trading opportunities, including currency, commodities, and stocks.
However, there are plenty of drawbacks that may have you reconsidering whether CFD trading is right for you. With a solid strategy behind you, CFD trading can prove profitable. However, having to cover the spread can eat into your profit margin. It’s also restricted in many countries, making it a no-go for many investors. Even if you’re based in a territory where CFD trading is allowed, it’s largely unregulated. Risk is high when it comes to CFD trading. If you’re not prepared to absorb huge losses, you might not be ready for CFDs.
*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.