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Saturday, October 31, 2020

Trading CFDs: A Crash Course

One of the best forms of investing your hard earned money from your day job has got to be Trading CFDs. This form of trading enables you to enter trading without having to invest a huge amount of money based on how leverages would work. Leverages in CFD enable you to get more exposure in the market and give potential return of equity at a very fast rate. This is one of the few reasons why a lot of people are into CFD instead of traditional forms of financial markets.


What is Trading CFD?


CFD stands for Contract for Difference and is a form of contract where two parties exchange the difference in the value of certain financial markets based on when the contract was initially opened and when the contract is closed. Being a derivative, it has the prices based on the underlying market and its prices during the time. For example, you can look into the crude oil market in the US given the underlying market of crude oil in that country. Another reason why traders would look into Trading CFD is because traders would not need to own any of the underlying assets and you are basically speculating on the expected buy or sell market of the underlying prices.

 

Why go into Trading CFD?


Three main reasons why you can get into trading with CFDs:

 

Tax Efficiently - If you are a UK based trader, you will not need to pay any Stamp Duty

Trade Widely - trading CFD enables you to choose from different markets from individual shares, forex, commodities, stock indices and others.

Trade Flexibility - You may speculate not just with markets rising but also falling.

 

Trading CFD at a Very Low Cost


With some brokers, you are able to do low cost trading. Usually, traders would only be charged with the commissions and the spreads when dealing with CFD. Usually, it will be more costly as you trade with brokers that have very high commission levels and wider spreads. What is great about brokers in CFD is that the financial spreads are offered for free. The profit of certain brokers will come from the spreads they add to the underlying market but still considering a very tight spread making your costs to a very low rate. Of course you will need to consider that keeping your position overnight will garner some extra charges.


Risks in Trading CFD


Despite the control in financial spreads in terms of cost, there are a lot of things needed to be considered with trading such as risk management tools that will enable you to control any form of unnecessary loss. Exercising usage of tools like Stop-Loss orders, that will guarantee you to limit the trade or end trade as you are away from your keyboard will be very essential in your trading needs. As a trader, you will need to be well versed with such so that you do not incur any form of loss you may not be able to lose. With the leverages in CFDs, trading is high risk given that such ratios will enable you to incur losses that are way beyond what you initially deposited as your capital so having a good knowledge of risk management tools from your brokers is a must. As a trader, always make sure that your spreads only meet the investments you initially need.

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