CFD Trading For Beginners
If you’re new to the world of CFD trading, you may be feeling a bit overwhelmed and not sure how to start. If that describes your situation, this article is for you. Here, we’ll cover the basics so you’ll be able to dive right in with confidence!
Beginning at the beginning then, CFD stands for “Contract for Difference.” Understand here, that you’re not buying a stock, which gives you ownership (well, partial ownership) of the asset/company in question. Here, you’re buying a contract that expression of the value of the underlying asset. You make your purchase at a given price, and then, see profits or losses if the value of the underlying asset increases or decreases over time.
And now that you know what kind of investment this is, it’s important to set a few expectations:
- CFDs are high-risk investments, and they’re not available to US investors.
- If you’re new not just to investing in CFDs, but to investing in general, you probably don’t want to start off investing in CFDs. It’s almost always better to get your feet wet in some lower-risk type of investment and then gradually move part of your investment capital into CFDs.
- You’re not going to get rich overnight. Yes, you can make a lot of money investing in CFDs, but this is certainly not a “get rich quick” scheme. In fact, if you’re not careful, you can lose all the money you invest, so caution is the order of the day!
- You’ll need to understand how to conduct basic research before you even think about investing, and in fact, you’ll be well-served setting up a demo account so you can test your investment strategy before risking any actual money.
Having said those things, let’s take a closer look at CFD trading itself:
As we mentioned above, when you make an investment in a CFD, you’re not actually buying the underlying investment itself. That makes this type of investment much more like spread betting than say, buying a company’s’ stock.
After you’ve conducted your research, you make your CFD investment based on whether you think the price of the underlying asset will go up or down. If you think it will go up, then you’ll take a “long” position on the CFD. If you think the price will drop, then you’ll take a “short” position.
If you are correct, then the seller pays you the difference between the initial price you purchased the CFD and its new price. If you are incorrect, then naturally, you have to pay the difference and the trade is a loss for you.
As with most things in the investing world, every aspect of investing has multiple different terms that all mean essentially the same thing, so don’t let that throw you.
For instance, take a look at the price of any given CFD. The buying price is also called the offer, or the asking price, and the selling price is called the Bid Price. The difference between the two is called the spread.
It’s also important to understand that you can buy CFDs that represent a wide range of underlying assets, including shares of individual companies, stock market indices, commodities, or currency pairs.
So now that you know the basics, the next natural question is how do you actually go about making your first trade. The good news is, that’s easy!
The first thing you’ll need to do is set up an account with a broker that handles CFDs. There are a number of fantastic, highly respected brokers to choose from, so this ultimately comes down to personal preference and finding a broker you’re comfortable with and whose system you can navigate easily.
Once your account is set up, you simply find an investment opportunity you’re interested in and place a buy order. The particulars on how to do that will, of course, vary from one platform to the next but all of the platforms offer at least some level of support, and all work hard to make the investment experience as simple and hassle-free as possible.
And that’s it! Again, we’d urge you to set up a demo account first and test your investment strategy before actually putting your money at risk, and then, when you feel you’re ready, have at it!