Q: What Are Some of The Benefits of Using a CFD Trading Platform?

Profit in rising and falling markets. With CFD trading, you are simply speculating (betting) on the price movement of an asset without actually owning it. Therefore, you can speculate that the asset will increase or decrease in value. In other words, profitable CFD trades can be achieved in a rising market by buying (“ going long ”), or in a falling market, by selling (“ going short ”). Leverage: allows CFD traders to trade the financial markets using funds that represent a small fraction of the trades’ actual value. This can help magnify your potential profits; however it is important to understand that trading with leverage can also be a very serious risk if the trade goes bad. Access to global markets. One of the key ingredients to successful investing or trading is diversification, and CFD trading gives you just that. Most CFD brokers will give you access to all the world’s markets, including international stocks, currencies and commodities – all without having to leave your bedroom. No ownership. As you are simply speculating on the financial markets and not actually purchasing the physical asset, you don’t have to worry about ownership costs etc.

Q: What Are Some of The Risks?

Large losses. Trading on margin means your potential profits can be magnified very quickly, but equally, your losses can be magnified just as quick. CFD trading requires a certain level of experience and may not be suitable for all investors. Volatility. Market volatility can be ruthless and your entire account can be wiped out in seconds. Gapping is a real risk too. Gapping occurs when the price of an asset shifts suddenly from one price to another, very quickly. When gapping occurs, you might not be ‘ stopped out ’ at the level you requested.

Q: Why Do People Start CFD Trading?

There are typically 5 main reasons why people trade CFDs: 1. To make a profit on the price movements of a financial asset 2. Leverage: when you trade CFDs, you get access to leverage which means you only need a small outlay to trade 3. To hedge against an existing portfolio. Some traders will use CFDs as a risk management tool against an existing stock portfolio 4. Access global markets – all from one CFD trading account 5. Short selling. CFD trading allows traders to ‘short the market’. That is, rather than BUY in the hope a market rises in value, a trader can go SHORT and sell the financial instrument.

Question 1

What is CFD Trading?

Accepted Answer

A Contract For Difference (CFD) is an agreement that is made based on the price of a financial asset. In the “contract”, a trader decides whether they believe the price of the underlying (financial) asset will increase in value, or decline, between the time the contract was opened and when it is indeed closed.

Furthermore, it is important to note that CFD trading is a form of leveraged trading that allows investors to speculate on the price movement of a financial instrument (such as a stock). However, at no point do you own the asset itself – you simply trade the CFD which is provided by your CFD broker.

Question 2

How Does CFD Trading Work?

Accepted Answer

If you believe the price of an asset such as a stock, index, currency or commodity is going to increase, then you would enter a “buy” position, or “go long”. If you believe the price of the asset will decrease then you would enter a “sell” position, or “go short”.

Here’s an example of how CFD trading works:

The ASX 200 is currently trading at 5,600. Your CFD broker is offering a price of 5,599 (sell) – 5,601 (buy). There is a 2 point spread (the difference between 5,599 and 5,601).

You believe that the ASX 200 price will increase in value (from 5,600). Therefore, you decide to BUY ten contracts of the ASX 200 at 5,601. Four hours later the price has moved to 5,638 and you decide it’s time to exit the trade.

You close your ASX 200 CFD trade at 5,638. That is a difference of +37 points from where you opened the trade earlier.

A 37 point difference x 10 units is a $370 profit for you!

Question 3

What Are Some of The Benefits of Using a CFD Trading Platform?

Accepted Answer

Profit in rising and falling markets. With CFD trading, you are simply speculating (betting) on the price movement of an asset without actually owning it. Therefore, you can speculate that the asset will increase or decrease in value. In other words, profitable CFD trades can be achieved in a rising market by buying (“going long”), or in a falling market, by selling (“going short”).

Leverage: allows CFD traders to trade the financial markets using funds that represent a small fraction of the trades’ actual value. This can help magnify your potential profits; however it is important to understand that trading with leverage can also be a very serious risk if the trade goes bad.

Access to global markets. One of the key ingredients to successful investing or trading is diversification, and CFD trading gives you just that. Most CFD brokers will give you access to all the world’s markets, including international stocks, currencies and commodities – all without having to leave your bedroom.

No ownership. As you are simply speculating on the financial markets and not actually purchasing the physical asset, you don’t have to worry about ownership costs etc.

Question 4

What Are Some of The Risks?

Accepted Answer

Large losses. Trading on margin means your potential profits can be magnified very quickly, but equally, your losses can be magnified just as quick. CFD trading requires a certain level of experience and may not be suitable for all investors.

Volatility. Market volatility can be ruthless and your entire account can be wiped out in seconds. Gapping is a real risk too. Gapping occurs when the price of an asset shifts suddenly from one price to another, very quickly. When gapping occurs, you might not be ‘stopped out’ at the level you requested.

Question 5

Why Do People Start CFD Trading?

Accepted Answer

There are typically 5 main reasons why people trade CFDs:

1. To make a profit on the price movements of a financial asset

2. Leverage: when you trade CFDs, you get access to leverage which means you only need a small outlay to trade

3. To hedge against an existing portfolio. Some traders will use CFDs as a risk management tool against an existing stock portfolio

4. Access global markets – all from one CFD trading account

5. Short selling. CFD trading allows traders to ‘short the market’. That is, rather than BUY in the hope a market rises in value, a trader can go SHORT and sell the financial instrument.

Question 6

Which Markets Can You Trade Using a CFD Trading Platform?

Accepted Answer

The options are almost endless – some brokers over over 30,000 instruments to trade!

That said, the most commonly-traded CFD markets are typically shares, commodities like oil & gold, indices, forex, bonds, cryptocurrencies, ETFs etc.

Question 7

How Do You Know if CFD Trading Is Right For You?

Accepted Answer

CFDs are a complex investment tool and there is a high level of risk involved.

They are not suitable for most people so please ensure you understand the risks involved before trading them. CFDs might be a suitable investment tool if you;

Have traded before and consider yourself an experienced trader;

Possess a strong understanding of CFDs and other financial products;

Have a high risk tolerance;

Can afford to lose some money;

Do not want to own the underlying assets;

Understand the risk management tools available, i.e. stop-loss orders etc.

Have completed lots of research.

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At CompareCFDBrokers, we consider clarity and transparency as core values. CompareCFDBrokers is free to use for everyone, however, we may earn commission from some of the partners listed on our site.