What is CFD Trading

What is CFD Trading and How do CFDs work?

Buy_and_Sell

What is CFD Trading and How do CFDs work?

What is CFD Trading and How do CFDs work?

CFD is an acronym for ‘Contract for Difference’. They are contracts that enable traders to take positions when the market value of a security moves either upwards or downwards. When entering a contract, a trader predicts whether a security’s value will subsequently increase or decrease. If the prediction is correct the trader will be in line to make a profit, whilst if the market moves in the opposite direction to the trader’s position, the trader will incur a loss if they close out at that point. CFDs are a form of derivative product, meaning that trades can be made without a trader owning the underlying asset.

Each CFD contract has a ‘buy’ and ‘sell’ price. Traders can buy, referred to as ‘going long’, or ‘sell’, known as ‘going short’. CFDs have several major advantages that can increase this trading format’s popularity with investors. We will now describe a few of these:

Leverage Trading

Leverage Trading

Leverage Trading


CFDs give traders the opportunity to use significantly greater leverage than traditional trading. This means that traders are only required to deposit a small fraction of an asset’s underlying market value in order to enter a trade. Leverage in the CFD market will often vary with the asset in question, and this aspect of CFDs has proved appealing to many investors, as a small sum of capital has the potential to generate great returns. However, if the market moves in the direction opposite to one’s trade, losses are amplified too.

Hedging with a CFD

Leverage_Trading

CFDs enable traders to sell short, meaning that traders can profit from falling market prices. For this reason, many investors use CFDs as a way  to try and protect themselves from future losses in a share portfolio. They attempt this by using a trading technique known as ‘hedging’.

For example, if a trader has proceeded with a trade that anticipates upwards market movement, but then becomes worried that the market is going to decline in the short term, they can use CFDs to offset their potential losses by ‘going short’ on that same security for a period of time.

So, to continue that example, if that security’s market value does indeed decline, the profits earned from the CFD hedge would serve to some extent to offset the losses incurred from the original open position.

ETX Capital traders should note that CFDs can only be hedged using the ETX MT4 platform.

CFD Trading – Further Information

CFD Trading – Further Information

CFD Trading – Further Information


CFD trading is one of the most popular methods of derivative trading globally; it offers a significant level of leverage, has relatively small margins and allows investors to trade on the market movement of an asset in both directions. It enables traders to take advantage of stop losses and limits, which are useful tools in potentially maximising returns and minimising losses on a position (traders should not that not all forms of stop losses or limits are guaranteed).

CFDs offer traders the potential of very high returns, although they also carry a high level of risk – traders can lose more than their initial deposits. In addition, traders should note that overnight trading charges may be applied to CFDs.

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