Understand CFD Trading

Introduction to CFD trading

A contract for difference (CFD) is essentially an agreement between a trader and a CFD broker or bank. At the end of the contract, the parties exchange the difference between the opening and closing prices of a particular financial instrument, such as a share or the Dax index. It is important to stress that at no time do you have the physical value, i.e. the stock itself.

CFDs are leveraged products. This means that the money you invest usually represents only a fraction of the market value of the shares (or any other value). So we are talking here about so-called margin trading. As a result, CFD trading is not only available to large investors, but is also suitable for small investors.

A difference contract is also a very popular trading form of derivatives trading. CFD trading allows you to speculate on rising or falling prices of fast-moving global financial markets (or instruments) such as stocks, indices, commodities, currencies and treasuries, as opposed to stock trading. You can also use CFDs to hedge an existing physical portfolio to protect yourself from the risks of high volatility.

Understand CFD Trading

When you open a CFD position, you first select the relevant market and the number of CFDs you want to trade on the trading platform (e.g. MetaTrader). The profit increases with each point as the market develops in the desired direction. The same applies, of course, the other way round, which means that there should be losses if the market develops in the opposite direction.

Example: If you think that the price of oil is rising, then you can place a purchase order to trade 500 CFDs at the price of 49.33 USD. If the market rises 30 cents to US49.63 US cents and the position is closed, the result is a profit. If you close your position, you would make a profit of USD 150, which is 500 times the price change in the oil price. However, if the market moves in the opposite direction and the price of oil falls by 30 cents to USD 49.03, it would lose USD 150.

CFDs as hedging

Since you can go short and long when trading cfDs (also simultaneously), these products are also used as “insurance” to compensate for losses of a physical stock portfolio.

For example, if you hold many DAX stocks and fear that markets will fall, you can enter into a CFD short trade on the DAX to protect your stock portfolio, benefiting from falling DAX rates. Should DAX share prices fall, the depreciation of your equity portfolio would be offset by a profit in the CFD short trade. In this way, one can protect oneanother without bearing the costs and inconvenience of liquidating the stock portfolio, as these are usually higher than cfDs.

CFD Trading for Beginners

Why is CFD trading popular with investors?

CFD trading is a popular way for investors to actively trade in financial markets. The advantages of CFDs are:

CFD's are cost-effective:

Unlike equities, the broker charges only a fraction of the cost of opening a trade when trading CFD. There is no Commission at all in the trading of stock indices (Dax). You only pay the spread.

CFD's are flexible

It is possible to speculate on both rising and falling markets.

CFD's are leveraged products

You can spend a small amount of money to control a much larger value position.

CFD's are fuse instruments

You can use CFDs to offset potential declines in the value of a physical equity or commodity investment by betting on rising and falling prices with CFDs.

Is CFD trading suitable for me?

The CFD trading is ideal for traders who want to have the opportunity to achieve a high return on their money. However, due to the leverage effect, it also carries a significant risk and is not suitable for everyone. Therefore, it is recommended to trade on a demo account before trying it with real money. You should inform yourself in advance about the lever and its effects (leverage).

Which CFD markets can I trade in?

Stock indices such as DAX, Dow Jones, S&P 500, Nasdaq, FTSE
Stocks such as Google, Facebook, Deutsche Bank, BASF
Commodities such as oil, silver, palladium, wheat, cocoa
Other markets including bonds, interest rates and options

If you want to know how CFD trading works, then watch the professionals from TradersClub24. The largest German-speaking community for Forex acts as your personal trading coach and trades the DAX on a daily basis in the live trading room. Here you have the opportunity to watch 30 days without obligation and also learn proven trading strategies.

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