What is CFD Trading

CFD is short for Contract for Difference and is a derivative form of trading. The main attractive feature about it for traders is that it allows them to wager on the constant change of prices for assets like shares, commodities, indices, foreign exchange and treasuries in a way that is very cost efficient.

If a trader is confident that the price of an asset will go down they can buy it. In trading terms, that is to ‘go long.’ If they feel the price will go up can ‘go short’ which means to sell. Part of the cost efficiency in CFD trading is that it allows you to trade on margin, as in you do not have to expose the full capacity of your financial position in the market. And since you do not necessarily have to own the assets you are trading, you are not required to pay for stamp duty.

How does CFD Trading work?

As mentioned earlier you do not have to own the underlying asset to trade. Depending on the direction you think the prices will take off in, you simply need to buy or sell a certain number of units of a certain asset. These assets or instruments can be shares, indices, currencies etc.

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The fluctuation of prices is determined in points. For every point the price moves in your desired direction, your profit will multiply according to a number of units you have either bought or sold. For every point the price moves against you, your loss will be calculated in the same fashion. It is important to note that a potential loss can go past your initial deposit.

1) Leverage and margin

Since in a CFD trade you only have to deposit a minute percentage of the entire value of an instrument in order to trade, it is considered to be a leveraged product. The fact that you do not have to purchase the entire instrument and open a position with a minor percentage means that you are trading on margin. The upside is that you can make a significantly high profit out of a relatively low deposit. The downside is this same principle applies when it comes to losses. In fact, you stand to lose more than your initial investment.

2) Costs involved in CFD trading

  • Spread: The spread refers to the difference between the buying price and selling price of a trade. You will enter into a trade with the buying price and exit using the selling price. The smaller the spread between the two, the lesser the price must move before you stand to make a profit… or a loss.
  • Market data fees: A trader is required to open a subscription to access details of prices on the market. A fee is charged for each subscription.
  • Holding costs: If there are positions open on your account by the end of trading time for the day, you may be liable for a charge known as a holding cost. It could either be a positive or negative going by the holding rate applicable and your position’s direction.
  • Commission: This applies for shares only. A minute percentage of the marginal value only is charged as a commission for each CFD trade. For trades based in the UK for instance, commission charges begin at 0.1%.

Conclusion

As a novice trader, it is good to begin with a demo account until you are more familiar with the system. CFD trading is a great way to make substantial revenue out of tiny investments. However, it does come with its own unique set of risks but that is all part of playing the game.

What is the diference between CFD Trading and Binary Options?

CFD trades and Binary Options trades certainly have their similarities, but they also have some very clear differences. Often times, traders are curious as to whether they can utilize the two forms of trade in tandem with each other to maximize their returns on their investments.

To understand if this is possible we must take a comprehensive look at the two trading platforms and put them side by side to see exactly what’s what.

In this article, we will briefly go over the similarities between CFD trading and binary options trading and a more comprehensive assessment of their differences and hopefully draw out a rational conclusion.

So before we dive into the differences between binary options trading and CFD trading, let us reacquaint ourselves with their similarities. To start off with, they are both derivative forms of trading. They are both a departure from the stock market and currency market trading. Secondly, they are both small scale investments and carry significantly lower risks. Both with CFD trades and binary options trades, there can only be two outcomes and two main options. The trading time frames involved with these two forms of trading a feverishly quick compared to other forms. To start trading in binary options or CFD does not require a substantial initial investment to get you started.

How is CFD trading different to binary options trading?

First off, awareness of your profits or losses. With binary options trading, this is a clear cut issue. All the information you need to know in the event of a profit or loss is displayed before you call an option on a trade. You will know before the time of expiry, the pay-out rate you will receive if your prediction is accurate as well as the loss you will incur if your prediction is not.

In the case of CFD’s you will be in dark regarding your exact percentage of profit or loss until the time that the trade expires making it altogether trickier to deal with. This is by default, a result of the difference in the entry and the close price which can vary. So traders cannot know for sure where their investment will go till the absolute ending of the trade.

In order to be involved in different markets at a relatively cheaper rate, CFD trading requires traders to pay extra commissions for brokers as well as trades. These fees are not fixed as such and can change with each broker. This is unheard of in binary options trading circles. There are no commission, fees or leverage whatsoever.

The problem with leverage in CFD is that in the event of a trade backfiring, your loss can exceed your initial investment and that can be a nasty defeat. With binary options, a loss can never go past the initial deposit.

What’s more, binary options brokers will actually propose to refund a percentage of the losses incurred by traders if they end up out the money. That percentage is usually around 10-15% but it certainly is something.

On a global scale, binary options trading is the wider form being practiced. In the United States, for instance, CFD trades are not legal although binary options are so long as they are licensed and regulated.

Conclusion – CFD Trading vs Binary Options Trading

While there are similarities, after putting them side by side, it would seem that binary options trading comes off as a less risky form of trading to engage in.

Perhaps the most logical conclusion one can draw from the differences is that binary options trading is the more popular method and more risk friendly, especially to early traders. CFDs are more the territory of experienced traders who have played and figured out how to stay in the game many a time.

Is CFD Trading a Scam?

cfd trading scamCFD trading – like binary options trading and Forex trading – is a kind of market maker. Through it, traders can access and trade in various different assets and capitalize on the fluctuation of their prices.

While that is the central idea to the whole scheme, there are a whole bunch of other factors that help it along. These have the capacity to be exploited and manipulated in order to extort money from the traders.

These shady operations are usually the work of unlicensed and unregulated brokers who lure customers in with false hopes and promises. That said, even a fully licensed and regulated broker is not an absolute guarantee for obtaining trustworthy services.

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It is merely a sign of approval from a governmental authority to reinforce its competence and ability to deliver justly on your investment.

In order to ensure the game you are playing is not rigged against you, you must investigate as deep as you can into the industry.

Scams in trading stocks

The usual complaints associated with stock trading are the little things like commissions, fees and services. However, the online community is also awash with hundreds upon hundreds of nasty accounts of customers who feel betrayed by their broker and seek to warn others about them. The brokers in question are not exclusive of high repute and global recognition for trustworthy services.

That said, it is just as important to take this stories with a grain of salt since a lot of customers are not particularly articulate about the alleged scam that occurred and may not have fully understood the official terms & conditions involved before lodging their complaints.

Scams in CFD trading

CFD trading is generally considered to be a relatively riskier form of trade and is not legal in the United States while Forex trading is. The main reason for that is it in the interests of most of the futures and stock trading industries to keep CFD trading out of the competition.

It was certainly not out of compassion for traders to spare them from making a reckless mistake and losing big time on their funds. Without CFD trading in the picture, any lost funds would likely be theirs.

The answer to the question of whether or not CFD trading itself is a scam is a no.

CFD trading is simply a derivative form of trading that allows traders to trade in numerous markets on a global scale using a single account accompanied by its own unique features.

It is on the riskier side of the different trading forms as it carries the option of using leverage. You can leverage your account up to hundreds of times over what it is actually worth, but you will be taking an enormous financial risk there.

The idea is to take calculated and controlled risks so that you have a greater possibility of using this form of trade in an efficient and safer manner without risking too much of a financial downfall.

It is best advised to invest in CFD trades that are under the value of your own account so that you will not be using leverage so it will be less likely in the event of a loss that you would lose more than your initial investment. Using leverage, you stand in a position to win a lot of money as well as lose it and in CFD trading, the final outcome is notoriously difficult to predict until the time the trade expires.

So Is CFD Trading a Scam?

So can these forms of trading be classified as scams? Definitely not. As long as you know how they work and calculate well the risks involved, you can be assured fair play in your online trading activities.

How Safe Is CFD Trading

CFD trading, like any other derivative form of online trading has a unique set of features that set it apart. But the main attractive feature about it is arguably leverage.

Many traders are lured in with the prospect of making immense gains in profit out of relatively tiny investments but are not well informed as to the extent of the risk posed by leveraging a position and how it can backfire on your finances monumentally.

Is CFD trading really that risky?

Leveraging aside, CFD trading should be considered with the usual concerns associated with other online trading derivatives. In very simple terms, CFD trading can typically be tamed by seasoned veteran traders who are highly skilled and intuitive about the market as well as possess a solid amount of capital to cushion most financial blows.

All CFD trades are executed on a marginal basis, meaning you do not need to expose the full value of an asset to place a trade on it. You can deal with something as small as 10% of it. Not owning an entire asset also clears you of any stamp duty you would have to pay.

Let us talk more about leverage

The main instruments available for CFD trading are shares, indices, commodities, foreign exchange and treasuries. To make a profit out of even the slightest movement of the quoted price, the key tool you need to use is leverage.

As mentioned earlier, a key feature of CFD trading is the ability to trade on margin. The prime advantage of trading on margin is that CFD traders have easier access to the market since there is not a particularly large deposit required and positions are open for as low 10% or even 5%. What you are also exposed to as a trader is the movement of the price in direct proportion to the full value of the trading position.

So even if it is only a small unit you have claimed you are still liable to receive the profit or loss of the entire position. For instance, trading at a margin of 5% will leverage your position 20 times over, so if your initial deposit is $5000, you are exposed to a position worth $100,000.

Remember the tiniest fluctuation one way or the other can yield such a result. Therefore, if you profit from the position, all will be well, but a loss could land you in serious financial trouble.

So clearly, CFD trading is not for the faint hearted. It requires a thoroughly comprehensive knowledge of the market to make an optimistic bet. While the nuts and bolts of leverage can be a little overwhelming at first, knowing them inside out is crucial before committing to a trade in CFDs.

It is only natural for a trader to decide that the stakes are simply too high to make any kind of participation in the market. All one has to really do here is dial it down on the investments. Some brokers do offer mini contracts for those traders who cannot afford to lose more than they bargained for.

While it is tricky enough to try and take an educated guess at which general direction the market will move in, imagine having to worry about every minor little fluctuation that could result in triumph or a spectacular loss.

Conclusion – CFD Trading

The bottom line is there nothing inherently amiss with CFD trading. It is simply the prowess with which traders utilize it. For trading form that yields such magnified responses in either direction, you need to be on top of your game assessing the risks and determining the sums you dare invest in it

Can a Beginner Make Money with CFD Trading?

Regardless of where the market is headed, your primary incentive as an online trader is to get bread on the table and to do that, you need to coax some revenue. With CFD trading, there is a rather interesting game to play.

So what exactly is CFD trading?

Obviously, before you begin trading in CFD you should get a firm grip on what it is all about. As trading has taken to rapid expansion online from its more traditional forms, many new concepts have developed with attractive features that have attracted a global community of trading brokers and their numerous clients. CFD or Contracts for Difference trading is derivative form of trading designed to give traders unique access into the various active global markets and assets. CFD is very much part of the modern trader’s tool kit to maximize returns on investments. It is risky to use relative to other forms of trading and its most successful users are usually veteran traders with a wealth of experience and tactical acumen for playing the market.

CFD trading does share some similarities with the more popular binary options trading platforms, however with some unique features of its own that pose a higher element of risk to traders. It too offers just two options for traders; either to ‘go long’ and purchase a contract or ‘go short’ and sell it.

A key feature of all CFD trades is that they are a margin type of trade. It is never the price of the entire trade that is opened but merely a small part of it. And since you are not the actual owner of any given asset, you are not liable to pay a commission for stamp duty. So they are cheaper to invest in. Each trade is dealt with in currency, and how much of it is acquired by your account is down to how well your skills in the trade really are.

What you can trade with CFD trading

The type of instruments you can trade are shares, indices, commodities, foreign exchange and treasuries. All of these are relevant to domestic and foreign trades.

Choosing a service provider

When it comes to this decision, there are two main business models to consider: Spread pricing and Transparent pricing.

  • With the spread pricing method, your CFD provider will offer you a price to work with that is not the same as the underlying price. This way they can still make money without charging you with a separate commission. The main drawbacks of this method to be mindful or are firstly: you will not know in advance an exact amount of what the deal is going to cost, and secondly: the price that has been quoted will only work one way.
  • With transparent pricing, the price that has been quoted by the CFD provider is a reflection of the actual underlying price. And as a trader, you will have to pay a commission for each trade. And unlike with spread pricing, the quoted prices can work both ways.

Associated risks with CFD Trading

CFD trading offers traders the option of leverage. This enables them to buy assets that are hundreds of times over the value of their actual account. If the trade works out in their favour, they will win big money. However, if it does not, they will lose much more than what they had initially invested. This is the main reason why CFD trading is more for experienced professional than amateur traders.

Conclusion

So can a beginner make money from CFD trading? In theory, yes, absolutely. In reality however, best play it safe and hone your skills in less risky trading environment before taking your first shot at it.