CFD stands for contract for difference, and is a form of investment which involves trading on the global markets without actually owning the asset you trade with. There are a few factors to consider when looking at CFD trading, so here is a quick introduction.
What is it
This form of trading involves the creating of a contract between an individual and a third party over particular market movements. Essentially, you invest your money in the hope that the asset invested in will swing the way you predict.
Unlike investing in stocks and shares, for example, you never own the asset, and CFD trading covers a variety of different markets which you can explore. You also avoid the stamp duty incurred with traditional stocks, meaning that this form of trading is ideal for short term investments, as potential profits can be greater compared to the profits made from actual purchase of stocks and shares.
Brokers
CFD trading is usually undertaken through online brokers who offer a number of tools and features which help with day to day investments. When choosing a broker, you should look at how well the interface operates, credit ratings and possibly some online forums to see which is best tailored to your needs.
Many brokers offer demo accounts which allow you to practise trading with fake money, which is a valuable feature to look out for if you want to learn the market basics before investing any ‘real’ money. It is also useful to check which markets are available with any given broker, to make sure they offer the one(s) you wish to invest in.
Advantages
CFDs offer very high leverage compared to other investment methods, meaning profits can be magnified since you only pay a fraction of the trade price for each trade. This means you also spend less capital per investment, allowing you to spread money over a range of different markets.
You can also start off trading with far less money compared to asset investments, meaning you can, to a certain extent, control risk more given that you do not have the pile on more money than you can afford on any investment.
Drawbacks
High leverage works both ways, and can magnify losses beyond your account balance. It is therefore necessary to manage investments wisely and logically to avoid any major financial upsets. It is possible for costs to increase for CFD traders over a period of time, so it can be more beneficial to stick with other methods of trading if trying to profit from longer term investments.
You also lose any ownership rights you would have over buying assets directly, so this method is not for those wanting any ownership benefits from stocks/shares.
Trading CFDs is a popular and innovative way of investing money in the markets. If interested in pursuing this as a viable investment method, look at the information available to you and make sure you know the risks inside out so that you have the best chance possible of profiting.
