CFD Trading FAQs
What is a CFD?
A CFD (or Contract for Difference) is a contract that allows traders to speculate on the value of an underlying asset, similar to transactions seen in traditional share trading. Gains or losses are determined by the difference between the asset’s value at the open and close of the contract and then multiplied by the quantity of the asset (the number of CFDs bought or sold). Essentially, CFDs provide a vehicle for investors to benefit from potential price movements without taking physical possession of that asset. More: What is a CFD?
How do I begin trading CFDs?
Getting started in trading Contracts For Difference is relatively easy but, whenever a great deal of risk is involved, new traders should take the time to research the potential advantages and drawbacks that will inevitably be experienced once real money is committed to the market. This should not be considered discouraging but, like anything else, there are many factors that should be understood before opening and funding a CFD account.
There are many different brokers available now and investors have a wide variety options available that are tailored to suit your individual needs. We recommend you start with a CFD demo account, which simulates live trading conditions but does not risk real money. Once your strategies have been tested and you feel comfortable risking real money, you can start with a funded live CFD account.
What is margin trading and leverage?
Margin trading allows traders to use collateral capital to fund a larger-value trade. This is also called ‘leveraging’ a CFD position. The benefit of this type of trading is that it allows investors to control a larger number of CFD shares with the same amount of initial capital. All of the gains (and losses) that are accrued using the enhanced trade size belong to the trader.
One key point to remember, especially for beginner traders, is that the margin, the initial trade funding, must be kept intact. If the leveraged position moves in an unanticipated direction, the losses will be magnified and a larger percentage of your trading account will be at risk. If your account size drops below your margin level, all trades will be closed (at a loss). To prevent this from occurring, traders can use stop-loss orders to limit their risk on individual positions. With InterTrader.com all positions have a (non-guaranteed) stop order attached automatically. More: Risk protection.
How Can I Choose the Right CFD Broker for My Trading Style?
One of the biggest factors involved when choosing a CFD broker is the dealing charge, i.e. the fees (commissions) charged when trades are put in place. Another factor is broker liquidity, as a broker that lacks sufficient liquidity could potentially prevent a trader from exiting a position at the preferred time. To find the right broker, traders should ask the following questions before funding an account:
- What are the CFD Margin requirements?
- How much interest is charged when long CFD positions are held overnight?
- Is the trading platform clear, reliable and easy to use?
- What accreditation is held by the broker?
- What are the commission charges in each CFD trade?
- Which assets can be traded?
Because of the highly competitive nature of the CFD trading industry, brokers have enabled a wide variety of trading instruments to attract new investors to their platforms. Similar to spread betting, CFD investors are able to place trades in the following categories:
• Currency pairs (EUR/USD, USD/JPY, GBP/USD, EUR/JPY, etc.)
• Equities (FTSE 100 companies, S&P 500 companies, DAX companies etc.)
• Commodities (Gold, Oil, Silver, Corn, Wheat, etc.)
• Stock indices (FTSE, S&P 500, DAX, DJIA, CAC, etc.)
What are the advantages of CFD Trading?
There are benefits to CFD trading which make this type of investment more attractive to many traders. One benefit is that CFDs can be traded using margin leverage, enabling traders to maximise their returns on their investment capital. Another benefit is that CFD trades are often not subject to the same taxes that apply to many traditional trades, although this will vary by jurisdiction. CFDs also give traders access to a wide variety of markets and a large number of different asset classes.
Another factor to consider is that trades can be made in both bullish and bearish markets. Returns can be achieved through long positions when the market is rallying, while the same is true for short positions (sell positions) when markets are in decline. This is an important aspect of CFD trading because investors are not limited by the prevailing economic environment.
Finally, you should note that CFD brokers enable traders to limit their losses by using stop-loss orders. A stop-loss order lets a trader set a loss threshold, a predetermined level at which the trade will be closed automatically if prices move in an adverse direction. This allows traders to reduce the impact of unfavourable trades, while successful trades are allowed to run further. The difference between running gains and restricting losses is central to successful trading over the long term. With InterTrader.com all positions have a stop-loss order attached automatically. Please note, stop-losses are not guaranteed unless you have specifically selected your trade to be guaranteed. More: Risk protection.
All of these factors create an added layer of flexibility to CFD trading, which makes the CFD the preferred investing instrument of a large portion of the trading community.
While InterTrader.com attempts to ensure that the information herein is accurate at the date the information was produced, it does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances is it to be considered an offer, solicitation to invest or be construed as giving investment advice.