What is a CFD and what exactly is CFD trading? There are a number of important parts that you should read through before you start trading
A CFD is a contract between a buyer and a seller. In this case, the seller is the CFD broker and you are the buyer. The buyer does not become the owner of the underlying instrument, but receives the profit (or pays the loss) when the price rises or falls. This only happens when you close your CFD position.With a CFD you as a trader can bet on a rise (long) or a fall in the price of, for example, a stock, but also on the price of gold or bitcoin. So by buying a CFD you are virtually buying a stock.
- Contracts for Difference or CFD, as they are abbreviated, are a financial product that allows you to benefit from increases or decreases in the price of the underlying instrument. These instruments can be: indices, stocks, currencies, commodities and nowadays also crypto.
What are the advantages of investing or trading CFDs?
The biggest advantage of CFDs is that you do not have to pay the full value of your purchase at the same time and can make use of leverage. This allows you to open positions that are larger than your deposit.
- The advantage of this is that you can make more profit when you are right and the price moves in the right direction. The disadvantage of this of course is that you also make more losses when you are wrong and the price moves in the opposite direction.
- By the way, you can limit this risk of loss by making use of a stop loss. A stop loss is as it were an emergency brake which automatically closes the position at a price of your choice.
When trading CFDs, you are required to have a minimum amount of cover on your account in order to be able to hedge any losses. This is called margin and is a type of insurance for the CFD broker.
Here are a few more benefits of CFD trading
- Usually low transaction costs
- Lever operation
- Benefit from increases as well as decreases in share prices
- Large range of instruments such as stocks, commodities, crypto, etc.
- Most CFDs do not have a fixed end date. So you decide when you sell
- Example of a CFD long trade
- A CFD trade is the whole process from opening a position to closing it. below I will give you an example of a trade on the Netflix stock by means of a CFD.