Introduction to CFD Trading
Forex trading and the stock market can be a business filled with industry terms, and you can feel pretty left out if you have never traded with stocks in your life before. Everyone feels like that for at least the initial week of their first foray into trading, and you should be fine as long as you approach stock trading with the right amount of research – and that should start with getting to know as many of the possible industry terms as you can.
This includes the more common terms such as pips (percentage-in-points), EPS (earnings per share), marginal trading and the differences between a variable or fixed spreads. All of these terms can help you to become a more effective trader, and getting to know industry terms like these can already give you an advantage above any other newcomers to the stock market who haven’t gone to the effort of doing their research as well as you have.
Of course, learning the terms that are talked about less can give you an even further advantage above other traders competing for the same stock. Once you’re gearing up for more advanced levels of trading that come with higher-rolling investments and more experienced investors, you can stand to make much more money for your initial investment – and it pays to know the industry terms better than the back of your hand.
CFD Trading is one of the industry terms that you’re bound to encounter on the more advanced end of the scale – and Contract for Difference trading is an advanced trading technique that comes with a little more risk than your average investment (since it’s a form of what’s called derivative trading), but it can also change the levels of profit you can stand to make out of the trade in the first place.
This makes it an attractive, lucrative option for the traders who know what they’re talking about – and know how to spot trends. By the end of this article, you should have a considerably better idea of how CFD trades work and how you can use them as part of your own trading strategy to gain the advantage over the market.
Here’s the essential article on CFD trading that’ll tell you everything you need to know about Contract for Difference trading and teach you some techniques to help you come out on top for almost every trade.
What CFD Trading Stand For?
As you might have guessed by now, CFD trading is short for Contract for Difference Trading, and it’s a form of what’s called derivative trading. Derivative trading is any kind of stock or asset that depends on another asset for its value – and thus “derives” its value from the initial corroborating commodity.
There are different types of derivatives – all assets that “derive” their value from another commodity or asset that has a set value. One example of a derivative would be what’s called a Forward Trade, where you and the broker agree on a current value for an asset for a future deal – and come to a mutual agreement to purchase this thing for that price at a later stage.
In the case of a forward deal, the entire trade will “derive” its value from the deal made between buyer and seller. Contract for difference trading works a lot like this, except it applies directly to the stock market and commodities seen there instead of other assets such as property.
In a CFD trade, the buyer and seller will speculate on the value of a specific stock – usually one that’s particularly subject to change very fast. Sometimes these stocks are volatile and sometimes they’re risky, but the one thing that’s certain no matter what is the fact that CFD trading are reserved for some of the fastest moving stocks on the market – and they can get you right on the way to where you need to be for more successful trading.
How Does CFD Trading Work?
When put in the most simple terms, the answer to how CFD trading works hides right in the name. It’s a contract for difference trade, which means that a contract is made between the buyer and seller to enter into a specific deal for the difference between the buying and selling price of the stock.
It doesn’t seem that complicated at first glance, but it’s a lot like playing checkers: It takes you five minutes to master the rules, but it can take you years before you can consider yourself even a novice at the game itself.
If you consider yourself an amateur at trading stocks, CFD trading will be best approached in cooperation with a trusted and verified broker that knows more than you do; if you aren’t sure how to choose a broker, the sections at the end of this article can tell you more about the essential factors you should look for when making your choice.
But first, let’s talk about just what CFD trading can mean for your investment.
CFD: Why You’ll Need a Broker
Contract for difference trading is one of the stock market trades that you don’t explicitly require a stock broker for, and you can make CFD trades without having to hire one. But this is a very, very bad idea – especially if you’ve never spent money on the stock market before and even if you have.
While the rules might state that you don’t need a broker, you should always have one by your side if you plan to invest in contract for difference trading. If you don’t, then you’re only taking the risk of tanking your own investment – and if this happens, then you’ll only have yourself to blame for it.
Brokers have years (sometimes decades) of experience in keeping an eye on the stock market, and their salaries have depended on it for years – they know what they’re doing, and there many times where it’s best to approach investing with a broker just because of the fact that they’re far more experience than you.
If your broker does well, it’s beneficial for both their salary and your investment – but if a broker screws up, then he’s putting both your investments at risk. Simply, this means that accredited and trusted brokers are a good idea just because they will protect your investment like they protect their own.
Three CFD Trading Advantages
Why consider contract for difference trading at all? Here are three of the best advantages of CFD trading that show why investors should consider CFD trading as their chosen form of investment.
- Contract for difference trading is a useful form of leverage that allows you to trade even if you don’t have the full value of the trade in your account; this can put you in a whole new class of traders, and can earn you the large sums of money even if you haven’t made it big as a first-time stock trader just yet.
- Many first-time investors are bound to their local stock markets for the first few years of their investments – and CFD trading is an easy way to get your foot in the door of international investments, stocks and companies that otherwise would have taken you years of work to work your way up towards. Overall, CFD trading can broaden your reach as an investor – but remember that it can also increase the risks you face while you’re getting to the top
- The potential profits for contract for difference trading can be huge – and they can be considerably bigger than the initial investment that you put into the trade. They have many benefits for both brokers and investors, and if you approach the right trade at the right time with a trusted broker, you’re pretty much guaranteeing that you’ll have a good return if the stock improves.
Comparing CFD Trading Options
When you start your first foray into the world of stock market trading, you’ll be faced with a variety of different options that all promise to teach you the secrets of the stock market – but not all of these deliver. When you’re choosing a trading option (especially for CFD trading), then it pays to pick carefully.
Make sure that the trading platform you choose has a good track record, and that they’re registered with all of the necessary authorities in your country. This has the potential to save you a lot of headaches in the future, and it could all have been avoided if you had just taken this piece of advice right here and compared your CFD trading options against one another until you find the one that’s best for your needs.
Many stock market trading websites will offer you the option of a trial-run where you can try out the service for a few hours, days or weeks – this gets you used to the individual platform, but it also gives you a chance to see if everything the broker promised really checks out as it should.
Registered, Accredited Brokers
Brokers and platforms that offer CFD trading as an option are subject to specific laws, and brokers in general are subject to laws that mean they have to be registered and accredited financial service providers – usually registered in the country where the platform is based, or in the country that they’ll be trading from.
Proof of this registration is given in the form of a registration number, and you should always verify this number with the appropriate authorities to ensure that you’re trading through a legitimate, registered broker.
Don’t take any broker’s registration number or claims at face value and always check it out for yourself before trusting them with your money: There are many instances where a registration number appeared completely legitimate, but wasn’t – and a simple five minute search would have told you. More info on the ASIC website
Brokers Abroad & the Law
When dealing with a broker abroad, take special care to verify the laws of your country or region before trading. Traders based in the United States, for example, have to stick to clients that are similarly based in the US – and a trader that’s registered in the UK can’t conduct trades on your behalf unless they have appropriate registration elsewhere.
Again, double-checking this is as easy as taking a look at your country’s laws and running a registration number through a search engine before you trust anyone with your money – and it can save you thousands.
Can I Trust My Broker?
Always choose a broker that you can trust, and if you’re questioning this at all after your first, second or thirty-second deal, consider finding another broker – especially if they’ve given you a reason not to trust them. Some brokers just don’t mix with certain clients, and constant disagreements with your broker is a good reason to seek someone else.
You should also find another broker if they aren’t completely willing to answer any questions you might have – the best, most trusted brokers are ones who are transparent and don’t mind telling you exactly what they’ll be doing with your money.
Track Record of Brokers
What’s the one thing that should put you off a broker completely?
Risky trades, especially when we’re talking about contract for difference trading. Here, the level of risks are greatly maximized – and if your broker screws up, you can take a much larger beating than if you had traded with straight-valued fixed spread stocks.
Only take on CFD trades with a verified, registered broker with a track record of excellence. Anything else can mean that you’re risking your money and investment – and could put your entire investment portfolio at risk.
The right CFD trade approached with the right broker at your side can be highly profitable, and it can put you right in the rankings of some of the most successful traders of all time – and if that sounds attractive to you, speak to your current broker about contract for difference trading and how you can approach it, or find yourself a broker who can help you to choose the best contract for difference stocks for your money.