If you are new to trading and think that CFDs (Contracts for Difference) could be the trading product for you, it can be important to know exactly what it is you are getting yourself in for. The leveraging can be particularly attractive, alongside the host of financial markets on offer, so let’s take a look at the right place to begin.
What is CFD trading?
In the simplest way possible, a CFD is a contract that is entered into with a brokerage to pay the difference in an asset’s price as defined between the opening and closing of a trade. One of the aspects that appeals to beginner traders is the fact that the underlying asset is never owned, but instead speculated upon to bring profits.
Of course, one of the biggest plus points is that leveraging is used in CFD trading, meaning that individuals will be able to take up trading positions with little collateral (however losses can exceed initial deposits). CFDs function with traders putting a margin amount towards the trade and lending money from a brokerage to make up the rest. Not only will this allow for more expensive trades, but you could open up more positions with the additional financial backing.
Brokers typically set the percentage they want a trader to submit and this will be dependent on factors like the chosen asset, the potential for the trade and the parameters set by the trading platform you use.
While all of this may sound worthwhile, it is important to remember that there are risks to CFD trading, namely that losses made when leveraging positions can quickly add up. They may even be more than you initially budgeted for, as they are calculated across the entire spread and not just on your margin.
If you still find yourself asking “what are CFDs?”, you can discover more here.
Where to begin
Beginner traders are not going to get anywhere without the support of a reputable broker and it can be important to do some worthwhile research before signing up to one. After all, if you make a decision without understanding what you want from your platform, this could potentially impact your overall experience. Look out for:
- Features like demo trading (this can be especially good for beginners to learn the ropes)
- Site security and regulation
- A user-friendly platform
- Any fees that may be charged
- The responsiveness of customer services and the avenues available for you to get in touch
Once you have defined the right broker for you, create an account, deposit funds, make use of your demo trading account and then make your first trade.
Are trading strategies necessary?
As the markets can be volatile and there are many traders out there looking to make a profit, it may be a good idea to implement a trading strategy to help you realise the profit potential of CFD trading. Here are some examples:
Scalping
Day traders utilise scalping to enter a high volume of smaller trades within the space of a single day. The principle behind this is that you will be making a collection of little profits that will add up, while distributing the potential risks. If you are hoping to be heavily involved in your trading endeavours, this can be the strategy for you.
Long term trading
The good news is that unlike similar financial products like spread betting, CFDs have no expiration date, so traders will have the option to hold their positions. There can be fees and charges when doing so, so this is a consideration that needs to be made before any trades are undertaken.
Pair trading
This trading strategy will see traders taking up positions on two trades in the same niche; going long on the weaker asset and short on the stronger one. The focus should be on the difference between the two and the greater the movement away from each other, the higher the profit will be.
Is CFD trading a good choice for beginners?
As long as you understand the risks involved with CFD trading, have done your research and have signed up with a reputable brokerage, you are likely to find CFD trading worthwhile. CFD trading is regulated by the FCA, however there are pitfalls to consider, so be sure to practice risk management and always keep your trading budget in mind.
Disclaimer: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
