New traders need to gain knowledge about what is CFD trading in detail before they join the movement. Contract for difference or CFD is a form of trading, where you need to speculate whether the price will rise or fall. CFD trades can be applied to hedge a current physical portfolio.
How CFD works?
With CFD, you don’t sell or buy physical underlying asset but trade units of specific instrument depending on your prediction whether the price will fall or go up.
Markets covered by CFD
CFDs are versatile and cover an array of markets.
CFDs can be traded on extensive range of financial instrument. It depends on your brokerage platform’s access to different underlying markets. The range of trading markets are consistently expanding.
Types of main CFD markets
For every small price movement of underlying asset in your direction, means you gain multiples on CFD units sold or bought. On the other hand, if price go against, you suffer multiple losses, which is equivalent to the gains. Losses have the tendency to exceed your deposits.
Why are terms ‘Margin’ and ‘Leverage’ used in CFDs significant?
CFDs are leveraged instrument. It means you need to deposit small amount of total underlying asset value for entering a trade transaction. This is called ‘Margin trading’ or ‘Margin requirement’. Margin trading allows to amplify your profits and even the losses. Actually, just like profits, losses will be calculated on the gross value of CFD position. It means you can lose more than your capital deposit.
What are CFD trading costs?
Spread - Spread is the difference between buy and the sell price. It is the key cost of CFD trading. Trader enters a buy trade employing quoted buy price and exits applying sell price. Tighter or narrow spreads offer better value, so look for competitive spreads to decrease overall trading cost.
Holding costs - Holding cost is a charge subject to CFDs, which a trader hold in his account overnight. This small overnight fee is a kind of interest the CFD broker charges on money he loaned you to buy a position. It is based on LIBOR interest rates plus 2.5%.
Commission [applicable for CFD shares] - When you trade CFD shares, a separate commission needs to be paid for both opening and closing, usually 0.1%. While opening entry price is used to calculate the commission and when you close exit price is applied.
What common trading strategies can be applied?
Basically, investors need to make strategic decisions like -
In every case, CFDs give wide range of practical options. Many people don’t realize that they are always under some kind of strategic financial status, even if their money lies in the bank. Actually, you are making a wager that your money held is going to perform better than other assets. Remember, you are always exposed to market risk, to some degree.
CFD hedging is a protective strategy
You have invested in a physical share portfolio. In some conditions, you feel that your portfolio will lose a little value for short term then hedge physical shares applying CFDs. you can make an attempt to earn profit from short term downtrend by short selling same shares as CFD. It will help to offset losses from existing portfolio.
Many strategies are involved ranging from news trading to momentum trading to range trading to breakout trading. You need to understand different strategy options, so as to create a lucrative trading plan. Take time to recognize your specific goals and investment requirements, so as to implement a strategy suitable trading strategy.