There are a lot of terms used in the share market and you might be unfamiliar with some terms. It can be the same for CFD as the term might overwhelm some. But this article will help you to know what CFD is? What are different types of CFD, What’s the history of CFD? What are pros and cons for CFD? And how to trade in CFD?. So let’s dive right into it and learn about cfd and ways to earn money from CFD.
What is CFD?
Contract of difference or CFD is a contract between two parties buyer and seller. In this contract, the difference of price in contract and current asset price will be paid in cash. Delivery of security and physical goods is not there in CFD. CFD is used by experienced traders. It is an advanced trading strategy and it offers trade between price movement of derivatives and securities . CFD is used by traders to bet on the price movement direction of movement of related security or asset. If a trader expects a rise in the prices of assets then they buy and If a trader expects a fall in prices of assets then they sell.
What’s the history of CFD?
CFD was mader in 1990. It was created by the derivative desk of Smith’s new court. Smith’s new court is a brokerage trading company from london.
and it was later bought by Merrill Lynch for £ 526 million. CFD is the first in Over The Counter. Innovating CFD is certified to Mr.Brian Keelan and Mr. Jon Wood of UBS warburg. In late 1190, GNI( Gerrard & National Intercommodities) introduced it to private client and retail markets.
What are pros and Cons of CFD?
There are both advantages and disadvantages for everything let’s discuss advantage and disadvateg of CFd and try to figure out whether investing in CFD is beneficial or not:-
Let’s talk about all the pros of CfD and try to understand the benefits that are there in CFD trading:-
Price movement exchange:-
It offers exchanges in price movement of assets like ETFs,commodity futures, and stock indices.
Suitable long term and short term
CFD offers both short term and long term trade in assets. In a short position you gain profit when the price of an asset falls. It makes it easy and flexible for sers to trade.
Order execution is quick
CFD offers you quick execution of trade in assets. It depends on where you live . In stock it takes days to settle the trade while it’s instant in CFD. You open and close positions immediately. Ity gives flexibility to users.
CFD is cheaper than buying stock as there is charge for opening position charge and closing position charge in stock which reduces profit because of high cost but there is no charge for opening and closing position in CFD. Brokers are earning from spreads.
CFD offers you Leverage which gives the option to trade in a larger position with low market capital. The profit level; is not so high because the market doesn’t move much unless there is a huge amount of market capital. Leverage offers you larger profit with meagre market movement. But a huge amount of profit comes with a huge amount of risk which should be taken care of. You should be aware of it and make a proper decision without getting carried away in emotion. Emotion control is essential in trading.
You can lose everything:-
Stocks never drop to zero and it recovers back after drop but in CFD it closes out after dropping to a particular point. There is no recovery after dropping to that point .Some platforms like IGMFX that have low leverages which causes low level loss which can be controlled with stop loss. Make sure that you have enough money if trade is going against CFD.
You can over-trade in CFD because of the speed of trade. This is one of the biggest mistakes that new traders make.This is very common in CFD platforms. If a trader does not have emotional control then they open a wrong trade or open and close trade for a small profit. Both are big mistakes.
To keep a position open in CFD, there is a charge you have to pay. It’s like an interest charge that you have to pay for keeping your position open.There is a small finance fee for an open short position or leverage.
Leverage increases both profit and loss. Crooked brokers offer high leverage trade to new traders as they know that the trader will lose all the money. New traders should start with low leverage as there is high risk and they should be aware about this. High leverage trade is preferred to experienced traders as they can handle it much better than the new traders
How to trade in CFD?
There are few easy steps to trade in CFD,let’s discuss them one by one:- ‘
First you have to research and then decide which market you want to trade. The trading motivation by looking aṭthe trading and fundamental indicator.
Buy and Sell decision
You have to decide whether you will buy or sell. If it’s expected to rise then click on buy and if it is expected to fall then click on sell. But you have to study the market , look at the market price, do technical analysis and read charts.
Choosing trade size
You have to choose the size of CFD you want to trade. 1 CFD means 1 Physical Asset. You have to select the quantity on the basis of your
trading goal and understand what will help you achieve it with less risk.
Put A Stop Loss:-
You have to put a stop loss to prevent a huge loss when market price moves too far. This will prevent you from loss and gain more profit by putting it with different strategies like averaging, hedging, etc.
Monitor and close trade
Once you enter a position, then you have to observe the position and wait for the profit point and click on sell when you reach that point. In this you need patience as it takes time plus you need emotional control to make the hardest decisions.
CFD is an interesting option to trade in as it has a lot of potential and some features are much better stocks and shares. Even though there is leverage, overnight charges, there are chances of overtrader and you can lose everything but there is a chance you can gain a huge profit due to leverage in CFD. It is comfortable forr users because it suits both short term and long term, easy to exchange during price movements, order execution is quick and you can enter at a low price. The glass can be half empty and half full. The overnight charges might be the problem but it can be solved by investing through a right broker like T1 Markets. So try CFD as it is flexible and with low cost which is really suitable for a new trader. Even intermediate and advanced traders can earn with their knowledge.