The Basics of CFD Trading

by Darwin on February 22, 2020

While scouting around for trading opportunities, a trader considers, among other things, making profits. That is, after all, the purpose of trading; to make profits. CFD trading has gained popularity as a trading option. 

When you trade CFDs, you work with market fluctuations. You study assets keenly and try to predict which way the prices are headed. CFD trading is popular for the following reasons:

  • It allows your capital to go farther due to leverage
  • You can use DMA
  • You can hedge a share portfolio
  • Enables you to go long or short

How it Works                                                                      

If you are yet to try Contracts for Difference, you may be missing out on some good money-making chances. Here is a brief introduction to show you how it works.

Leverage – Stretch Your Capital

CFDs not only allow your capital to go farther but also enable you to purchase more than you normally would. This is because you only have to pay part of a trade’s value in order to open a position. 

The amount of money you are required to deposit depends on how big your position is as well as the margin factor. 

Buying and Selling 

With CFD trading, profits are made by the difference of the opening price and closing price of your position. This makes it a more versatile form of trading than others. The advantage of this is you can trade on markets that are rising as well as those that are falling. 

A CFD platform provides you with two listed prices: the purchase price and the selling price. The price you choose depends on your prediction. If you are convinced the price is going up, you buy. If you feel it is on the way down, you sell. This is known as going long and short, respectively. 

You Are Able to Trade a Wide Range of Markets

Veteran traders will tell you that CFDs give them the chance to trade a wide range of markets. You have more than 16,000 markets to choose from. These include the following:

  • Indices
  • Forex
  • Cryptocurrencies
  • Commodities
  • Options

Additionally, you have all these markets on one platform. Therefore, you only need one login to access the markets. You can access them on the internet via your mobile or your computer. 

This allows you to trade from the office, home or even when you are on holiday. Since trading is 24/7, you can trade at any time of the day or night. Office hours need not limit you. This also allows you to take advantage of company announcements. 

CFDs Are Much Like the Underlying Market

Contract for Difference trading is quite similar to the underlying market. When trading shares, positions must be modified to balance out the effect of dividend payments. As a result, you will miss out on the privileges of being a shareholder. 

Hedging the Share Portfolio                           

Hedging is a strategy traders use to manage risk. Basically, you hedge one investment by making another investment. It is a much used strategy in CFD trading because of the availability of both long and short positions. 

Seasoned traders opt for this strategy when they feel prices are headed down. If a decline happens and the trader is reluctant to close their position, they open another to balance out their trade. Hedging allows the trader to: 

  • Utilize price asymmetry for profit
  • Trade many assets to manage risk

Nevertheless, the assumption is the price will reverse and the trade will bring in a profit. If that fails to happen, the trader risks losing money.

Direct Market Access (DMA)

This is mostly for experienced traders. They are able to obtain direct market access which allows access to order books of stock exchanges and their providers. They can see every available bid as well as offer prices at any time and choose the market prices to trade. 

Thus, they do not have trade at the buy and sell prices on offer. In addition, a trader using DMA does not have any IG spread to pay. The trades are charged through commission. It is a neat tool but it offers no guarantees with regard to prices. 


CFD trading is a great form of trading that favors both novice and seasoned traders. It allows investors to trade online even outside the official trading hours. Being able to trade on both rising and falling markets is a great advantage. 

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