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 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 with CFDs is relatively easy but, whenever a 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, as with other forms of speculation, the risks should be understood before opening and funding a CFD account.
There are many different CFD providers now and you have a wide variety of available options tailored to 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 CFD position size 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. To help prevent unmanageable losses, InterTrader allows you to place a stop-loss order on any position, although you should bear in mind that stops are not guaranteed and may be subject to slippage and market gaps.
How can I choose the right CFD provider for my trading style?
One of the biggest factors involved when choosing a CFD provider is the dealing charge. Does the provider charge a commission per trade or are charges included in the dealing spread? Another factor is liquidity, as a CFD provider that lacks sufficient liquidity could potentially prevent a trader from exiting a position at the preferred time. To find the right provider, 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 CFD provider?
- What are the charges for each CFD trade?
- Which assets can be traded?
Because of the highly competitive nature of the CFD trading industry, providers supply a range of trading categories to attract new investors. Similar to spread betting, CFD investors have access to:
- 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?
One of the benefits of CFD trading is the low initial outlay, helped by the fact that CFDs are not currently subject to UK stamp duty. Also, as mentioned above, the use of margin leverage enables traders to maximise returns on their investment capital, while CFDs also give traders access to a large number of different asset classes.
Another factor to consider is that trades can be made in both bull and bear markets. Returns can be achieved through long positions when the market is rallying, and through short (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.
The use of stop-loss orders also helps CFD 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.
More: Risk protection.
All of these factors create an added layer of flexibility to CFD trading, which makes the CFD the preferred investment vehicle of a large portion of the trading community.
CFD trading with InterTrader
With InterTrader you can choose your own base currency for your account. Individual CFD trades are then made in the currency of the underlying market and subsequently converted to your base currency, if necessary. For instance, if your base currency is sterling and you are trading a US equity, your margin requirement and your profit/loss will be calculated in dollars and then converted into sterling on your account.