If you’re new to investing, CFD trading is one area of trading that can be very confusing. CFDs, formally known as trading contracts for difference, is a way to speculate on company’s performances without actually buying or selling any assets.You can speculate on numerous types of financial markets like forex, indices, commodities and shares without having to actually own the assets. Instead of purchasing any assets, you’re agreeing to pay the difference in value of an asset from when you first open the contract, to when you close it. So you’re basically agreeing to exchange the amount the asset increases or decreases in value. One of the aspects about CFD forex trading that is very exciting, is that you can speculate on price movements in both directions – positive or negative. The profit or loss you make is related to how correct your forecast was.
How Can You Leverage CFDs?
One of the most important features of a CFD is the fact you can ‘leverage’ by investing a small part of the total investment. If you’re trading as a private person, the maximum leverage ratio you can use is 1:30. The main advantage over leverage trading is that you can use it to achieve larger profits, however the reverse is true, too. If you use leveraging to access a bigger portfolio, but end up with a losing trade, the amount you lose will be greater too.
How exactly does CFD leveraged trading work? When you’re ready to open an order, you will have to choose the amount you want to trade. This will depend n your leverage ratio, but say it’s set to 1:5 and you have a $1000 balance. This would mean you could buy up to $5,000 worth of CFD shares. If the CFD shares increased by 5%, your profit would be 25%, but the inverse is true. If your CFD shares decreased by 5%, then your loss would be 25%. Leveraging allows you to make a bigger investment without fronting more cash.
What Are Some of the Advantages of CFDs?
You can speculate on falling prices
CFD trading has a low entry barrier – you can make trades with as little as $100
You can test all possibilities using a dem
You can limit your potential losses by implementing something called a ‘stop loss’
You can trade in known assets for a much smaller investment amount
You can use leverage as described above to magnify your gains
Things to Keep in Mind
Because you’re able to leverage the amount of money you invest to do bigger trades, it does make it easier for you to create considerable amounts of wealth from CFD forex trading. However, it also can be possible to lose your entire investment too. If you’re new to CFD trading I suggest that you either employ the help of someone more experienced to get started, or even use some of the CFD trading stimulators online to see how the trades work. When you start CFD trading, you’ll quickly notice that the value of a CFD is closely related to the actual stock value of the asset.
Trading CFDs can be a great way to transform your investment portfolio, especially if you don’t have a lot to invest. Hopefully this article helps you get started with this exciting type of trading.