You intend to start trading in the financial markets, but you are not sure what would be the most appropriate to start with. There are several types of trading that people usually choose to start with, and we think CFD is the best choice. The primary reason why we consider CFD to be the best starting choice is that your costs are small at the beginning, which is very important. You don’t have to invest big money to get started, or even to make a big profit.
However, even very experienced traders sometimes have difficulty understanding all parts of CFDs. This is not something to worry about if you study in detail everything you need to know about CFD (Contract For Difference). Once you understand a few basic things, everything will become much simpler for you and you will realize that you can navigate well in trading on the financial markets. This article will be of great help to you, because we will first briefly explain what exactly Contract For Difference is and then tell you all the benefits, but also the potential risks that you will face. So you are going to be completely ready to start trading.
Basics of CFD
Contract for difference, mainly referred to by the acronym CFD originated in the 90s. Its primary purpose was to be able to make a profit even when there were negative market trends. As online trading became more important, so did CFDs come to the forefront. Since all markets are just a few clicks away from you, it is considered that CFD will become the most important market tool in the coming years.
And how exactly does all this work? In some ways it is very similar to classic investing, but there are also many differences. When you invest in the classic way on the stock market, you buy something and then you hope it will gain in value and that you will sell and earn that difference in price from the moment you bought to the moment you sold.
With CFDs, you also wait for the price to change from what it was at the time of your purchase. But that is practically only similarity. What makes CFD completely different is that you don’t own the thing. You are just guessing whether it will gain or lose in value. Here we come to another difference, and that is that you can profit from the loss of value, because it does not matter whether the value increases or decreases, it is important that you predict it correctly. While with classic investing, only growth in value brings profit.
1. Ability to trade outside of your “league”
Certainly the biggest benefit you will get from CFD trading is the use of leverage. When you invest in the classic way, you can only buy what you have enough money for, that is, what is your margin. But with CFD, that is not the case and this gives you incomparably greater opportunities right from the start. When you start, it is likely that you do not have enough capital to trade any of the most valuable stocks or to try to buy as many bonds as possible to generate as much income as possible. But the CFD allows you to trade in things that are 300 or more times more valuable than your real capital if it complies with regulations and your broker. This means that with a small investment you can make a huge profit which only CFD allows you. Of course, not everything depends on you, but also on the broker.
2. You can wait
What makes CFD very different from all other investment tools is that it does not lose its value as time goes on. It doesn’t lose in value, and there’s also no expiration date so the decision on everything depends solely on you. You don’t have to sell it just because the expiration date is soon. So you can choose a strategy to wait and make big profits in the long run. It is not a strategy chosen by day traders, but for everyone else it can be very profitable. That is a big plus when everything depends on you, and you do not have to follow other external factors besides the price movement.
3. Going short
What has actually brought the greatest popularity of CFDs and set it apart from other types of investment is that you don’t just have to wait for prices to rise in the market. Then everything depends on the current situation on the market, and if a crisis occurs, as this year due to the coronavirus pandemic, you will almost certainly lose money. CFD gives you two approaches, and those are going short and going long. Going long is what you are used to with traditional investing, and that is to wait for the value to jump and then make money on it. But it has a few shortcomings because you are limited only to predicting value growth. CFD also allows you to go short, which means that if you think the value of something will fall, you opt for the going short option and profit regardless of the real value of it in the market. Also, many traders have gotten rich by first going short and then going long on the same thing.
1. You can lose more than you have
Leverage, which we have listed as something that offers you enormous possibilities, can also be considered a double-edged sword. Since there is no margin or at least not in the way as in other types of trading, you can lose a lot more money than you have. When there is a margin, if you invest 1,000 dollars it is also the maximum you can lose. But since you can speculate here with values that far exceed your initial capital, the loss can also be much greater than the money you own. We even found info on the expert website daytrading.com that you can lose 40,000 dollars on a 2,000 dollars investment, for example. Better said, 38 thousand dollars that you do not own, but brokers actually “lands” it to you. You have to be careful not to end up with negative balance.
2. It can move way too fast
That is why CFD is something that only experienced traders often decide to use as a tool, because things happen very quickly, sometimes even too quick for experts. Often prices change at a high rate and then you do not have the opportunity to sell at the amount you planned. That is because it simply doesn’t stop at the moment when you wanted, but just moves on to the next price, which no longer suits you.
We have another tip for you. And that is to research all markets in detail. Don’t rush to invest in the first market you notice, but take advantage of the fact that using CFDs you have access to all markets as well as all trading items. This includes literally everything, from stocks, through cryptocurrencies to gold and oil.