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.
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.