CFD for Beginners – How Does it Work?

CFD is a short-term Contract for Difference. This type of trading is perfect for retail traders because it allows the buying and selling of financial instruments in the market without paying the full price and not owning the underlying asset.

Benefits of CFD Trading

There are a couple of benefits that CFD trading has to offer including short trading a stock. Short trading stock can be a bit difficult because of some regulations that have to be followed. But with CFD, traders can do it very easily. Hedging your positions when tough times come is possible. This will allow you to earn profits even with the falling prices in the market.

 

Another thing that makes CFD famous is it's being a leveraged instrument. Because of leverage, traders can open a position without having to pay a huge capital. You can even open a large trading position upon paying a small capital. But you must be careful with leverage since it is a double-edged sword. The possibility of returns is a lot higher with a leveraged product but the risks are also doubled too.

In CFDs, you are given access to a wide range of markets, making it a convenient one-stop-shop for traders who want to venture into other trading avenues. You can trade in the markets like commodities, indices, bonds, cryptocurrencies, agriculture, precious metals, and Forex.

Risks of CFD Trading

You might be hyped upon knowing the benefits and advantages that one can reap with CFDs. Now, it’s time to face the risks that come along with trading CFD.

●     Counterparty Risk

●     You May Lose Everything, Your Capital, and More

●     Risk of Margin Top-Up

●     Risk of Stopping Prematurely

Counterparty Risk

What is counterparty risk? It is a type of risk that is associated with the broker. If stocks are traded through an exchange, CFDs are being traded through a broker. Since a third party is involved, if the broker goes under and so are you and everything else. You won’t have the power to get back anything including your hard-earned money. If you are too scared of that, you must start to consider finding a reputable and licensed broker before joining the market.

You May Lose Everything, Your Capital, and More

Are you for that? Is your capital ought to be used to buy home essentials? When you enter a trade in CFD, you must be sure that your capital is from your extra fund because CFD trading might make you lose so much, including the capital that you put in. This is how leverage works in CFD.

Risk of Margin Top-Up

For instance, you bought Crude Oil for $10,000 and the margin is 20%. Therefore, you need to have at least $2,000 to start trading in your account. But there comes the volatile periods. During these times, your broker might raise the margin to $40%. For you to hold the position, you will have to top-up more capital to maintain the open position.

Risk of Stopping Prematurely

Your broker has the power to stop your trades prematurely, something that wouldn’t happen if the trades are done on an exchange.