So you are a first time investor looking for investment opportunities, and somebody recommends you try CFD Trading. You’ve never heard of it, but you are toying with the idea of giving it a try if it yields handsome profit. Don’t worry. You will get to know all there is to know about CFD Trading in the next few minutes.
A contract for Difference
For a start, CFD is the acronym for Contracts for Difference, and as the name suggests a CFD is a contract between two parties with regard to the movement of an asset price. CFDs are a popular form of derivative trading which allows you to speculate on the falling or rising of assets such as indices, currencies, treasuries, commodities, and shares. The exciting thing about them is:
- They are leveraged – this means that you can gain a relatively large market exposure for a small initial deposit. In trading circles, this is called ‘trading on a margin’. Trading on a margin can either post a massive return on investment for you if things go as you speculated, or you can incur massive losses if things go south.
- They are a derivative product – believe it or not, you don’t have to actually own the underlying asset. All you’re doing is speculate on the price of that asset then scheme a way you can profit from the fall or rise of the price.
The costs: What is involved when it comes to CFD Trading ?
Whenever you’re trading with CFDs, you must pay the spread. This is the difference between the buying and selling price of the asset. The idea here is simple: you but a trade at a quoted price then exit using the selling price. In addition to paying the spread, you must also take care of the holding cost. Other costs like commission (which is only applicable to shares) and market data fees must also be taken into consideration.
With this in mind, it is fair enough to conclude that you now have an understanding of what CFD trading is and the costs involved in trading. You should understand that this is a risky endeavor as prices may move rapidly against you.