CFD trading for beginners: Knowing the Basics
Though I have always been interested in the finance business, I used to assume that I needed thousands of dollars to become a trader. This changed when my friend introduced me to CFD trading. Though I made a lot of mistakes when I was a beginner, I now have more skills in this. You can always learn more about CFD trading from this beginners’ guide.
What is a Contract For Difference Trading?
This type of trading is basically the selling and buying of CFDs. Contracts for difference are simply derivative products. To engage in this form of trading, you speculate financial markets as they fluctuate without owning an underlying asset. You can speculate on financial markets like forex, commodities, shares, or indices. It is like betting whether such financial assets will either decrease or increase in value.
What are the basics of CFD trading?
This is a binding contract between a trader and a broker. The two agree to exchange the difference in the value of derivatives or securities between when the contract opens and closes. If you engage in this, you can earn profit as long as the fluctuating financial markets favor you.
In CFDs, there is no delivery of any physical goods. If you engage in CFD trading and you expect an upward movement, you have to buy the CFD. Buying is referred to as going long. If you, however, speculate an opposite downward movement, you have to sell an opening position. Selling is what is referred to as going short. Losses and profits of short and long trades are realized when the position is closed.
How much money do you need to start CFD trading?
You can start CFD trading with as little as $1000. Most brokers, however, place a minimum deposit of between $2000 and $5000. CFDs, therefore, let you trade costly investments that you would not be able to.
Once you make the deposit, you can decide whether you want to take a short sell or long buy position. One of the things that captivate many to CFD trading is high leverage. Though this can amplify the profits that you can make, it also magnifies the risk involved too. Suppose you invest $5,000 in CFD trading, you can make $50,000 but still lose the same amount.
Is CFD Trading good for beginners?
No. CFD trading is not good for beginners and should only be left to experienced traders since it is an advanced trading strategy. Only people who have the right knowledge of CFD trading can make money from it. Though CFD trading can give you market access and has low fees, It is not the best for beginners since there is always the risk of losing your money when the market is volatile.
Apart from that, another problem with CFDs is that you cannot make long-term investments with them. Since CFDs have a time limit that determines if you gain or lose cash, it is not ideal as a long-term strategy.
If you want to try CFD trading as a beginner, you should first learn how the trading platform works. You can do this by creating a demo trading account. This is important since it can also give you insights into which trades are likely to give a return and which are not. You should also work with a regulated broker that can give you the opportunity to trade different asset classes.
Many traders have been pursuing CFD trading to try and boost their wealth. CFD trading can be profitable as long as you do your homework and make sensible trades. Note that CFD trading is, however, not for everyone.