Are you interested in trading CFDs (contracts for difference) but want to learn more about the risks and benefits before opening an account? That’s a wise move, as these popular derivatives have specific features and aspects that you should understand before jumping in. Anyone aiming to get involved in the exciting and fast-moving world of CFD action should take time to review how the instruments work, learn how to find a competent broker, weigh the benefits and risks of trading, and consider a few suggestions for first-timers.
Contracts for difference are not assets. When you buy or sell a contract, you are not buying or selling a tangible or intangible asset, like a share of stock or a commodity. Instead, you’re making a contract with another party, typically your online broker. This is essentially a prediction about the direction of the price of an underlying asset. So, someone can go long by purchasing a contract on shares of ABC Corporation stock. Instead, they aren’t acquiring shares but are predicting that the price will go up. Likewise, the tactic would be to sell a contract on ABC Corporation stock and hope the price goes down for those who want to go short.
Finding a Broker
Success amounts to two things. First, it’s about studying the market and making accurate predictions about price movements, whether they’ll rise or fall for a particular asset. Keep in mind that people trade CFDs on forex currency pairs, precious metals like gold, stocks, and even cryptocurrencies. The second most important piece of the success puzzle is finding a CFD broker who can help newcomers and support experienced traders at the same time. It makes sense to work with a brokerage company regulated in reputable jurisdictions, offers traders multiple asset classes, and delivers top-notch customer service. Long-running provider Easymarkets is one example that matches these criteria, as well as providing additional tools and conditions like negative balance protection and free guaranteed stop loss to help better manage risk.
There are several unique advantages for investors who prefer CFD-based trading. For starters, a contract is a legal obligation, not an asset. That means you aren’t obliged to take ownership of stocks, commodities, or other assets when you engage in this buying and selling. If you choose to use leverage, which most brokers offer, it’s possible to trade with more significant amounts than your initial deposit. Additionally, anyone can go long or go short with equal ease. That’s not the case for traditional stocks and bonds, where investors often have to meet strict requirements for selling short.
Most of the risks of contract for differences are closely related to the advantages listed above. For instance, leverage can cut both ways. Not only does it have the potential to magnify gains, but it can also enhance the size of losses. Plus, when you hold a contract overnight, you can incur overnight fees on every position in your portfolio that is still open.
Tips for Beginners
For those new to contract trading to practice placing orders on a simulator for a few weeks to get the hang of the mechanical aspect of getting into and out of positions. Finally, starting slow and making just a few trades per session is an excellent strategy for protecting your account balance.