CFD Trading: Dispelling the Stigma

Since the advent of online trading, CFD trading has become a popular way to trade global markets. It has, however, also had a stigma attached to it along the way, partially due to it being viewed as a riskier form of trading.

This stigma may, however, be unfair, and there are plenty of ways people can use CFD trading to their advantage. Here is some information about CFD trading, including how to go about trading CFDs.

What is a CFD?

A CFD is a contract for difference, and CFD trading is a form of derivatives trading in which you invest in an asset without ever actually owning it. It is called a ‘contract’ because it is essentially an agreement that the ‘seller’ will pay the ‘buyer’ the difference between the current price and contract price of the asset.

If the value of the asset moves in the direction you predicted, you make a profit, and if it moves against you, you make a loss. One of the key differences between CFD trading and regular trading is that you can invest in the underlying asset going down in value as well as up with CFDs, whereas regular trading only allows you to make a profit if the asset increases in value.

What Markets Can You Trade?

Most brokers allow you to trade CFDs on any market, meaning that you get a great deal of choice over which assets you would like to invest in. Whether it’s a steady market like gold, or a volatile market like forex, the diversity which CFD trading offers to traders is one of its greatest advantages.

Most traders go about trading CFDs much the same way they would regular trading, and the most skilled traders are adept at researching their investment and making fairly accurate predictions about the market behaviour of any given asset.

What Are the Risks?

CFDs can sometimes be viewed as a risky investment, largely because CFD brokers offer the option to use leverage. Leverage allows the trader to invest in a greater number of units for a fraction of the price, depending how much is used. This can magnify profits if the price moves with you, but can also magnify losses by just as much if it moves against you.

This is in addition to the fact that markets are often unpredictable. However, stop losses can help to counterbalance the risks associated with CFD trading, as they allow you to automatically exit a trade automatically if an asset’s value moves against you past your predetermined point.

Can You Make Money from CFD Trading?

Like regular trading, it is entirely possible to make money from CFD trading. It does, however, take time and dedication to build up a good trading strategy and the ability to effectively research investments.

Portfolio diversification, which involves spreading your capital over a number of different investments, is a good way to avoid placing all your eggs in one basket. Armed with good knowledge of the markets as well as the factors which influence an asset’s behaviour, you will have a good chance of reaping the potential rewards of CFD trading.

Ultimately, CFD trading is only as risky as regular trading, and any stigmas which may be associated with it should be taken with a pinch of salt. Provided you know the risks, as well as how to manage them, CFD trading can be as much a good form of investment as regular trading.