What is CFD Trading and Is It Beginner Friendly?

What is CFD Trading?

CFD trading, also known as trading contracts for differences, is a special method of speculation in the financial markets, and it does not involve any kind of buying or selling activity of the assets. In simpler terms, you don’t actually take ownership of the underlying assets for which you are making the speculation. If you want to trade forex, you can try out CFD trading, which we will discuss in detail in this article.

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Your Guide to CFD Trading

Now, you already know what the term CFD means, so let’s get into the details. Whenever a trader chooses to trade in CFDs, they are engaging in a contract with their broker. The broker here is the ‘seller,’ and the trader is the ‘buyer,’ and they have agreed to the terms of a contract that will be speculating on the price of a chosen asset in particular market conditions. Since the trader does not own the underlying asset, they do not have to bear the costs associated with the traditional form of trading. Neither do they have to go through any other disadvantages of it.

Now, you must be wondering how CFD trading works or how this contract operates. The profit and loss calculation in these contracts is usually done by looking at the price difference. For example, you take the price when the contract was entered into and then when you exited the contract, and you subtract the two prices. In case there is a loss, then the ‘buyer,’ which, in this case, is the trader, will have to pay the difference to the broker.

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Advantages of CFD Trading

Let’s briefly have a look at the list of advantages of CFD trading –

  • Gives you more leverage – One of the main advantages of CFD trading is that you simply have to have a 5% margin requirement for opening a position here. Thus, you need very little capital compared to traditional trading. The upside of this approach is that you will be saving yourself from incurring any larger losses.
  • You can earn in both bear and bull markets – Yes, you heard it right – CFD trading gives you the opportunity to earn in both bear and bull markets. Despite the fluctuation in the market, you can capitalize on any situation. Thus, this greater amount of flexibility gives the trader much more control over what they are doing and, more importantly, how they are executing their trades.
  • Lower trading costs – If you compare trading costs to the traditional model of trading, CFD is very cost-effective from all perspectives. Brokerages will usually be setting a daily percentage on financing the transaction.
  • Your hedging options are broader – Since the capital commitment in CFD is not much, you have more funds in your hands that you can use to limit your risk by implementing hedged positions. It is extremely useful, especially if you are taking a risk in your CFD position.
  • There are no expiration dates – When you see other financial instruments, you will always find an expiration date, but with CFDs, there is no depreciation with time. The restrictions on closing a position are much less, and they don’t even have a fixed expiration date for that.

Are CFDs Beginner Friendly?

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Now, we come to your question – are CFDs meant for beginners, or should you only come to them after gaining some experience? Well, you will be happy to know that CFD trading is perfectly safe for beginners and the main reason is the access to leverage. You are only investing a fraction of the money upfront, and the rest is being paid by the broker – who doesn’t want a settlement like that! However, at that same time, you must also keep in mind that as a beginner, you must never invest money that you are not willing to lose. In short, you have to learn to stay within your limits and formulate a proper approach to mitigating your risks.

Conclusion

You now probably have a basic idea of what CFD trading entails. It can truly be a rewarding experience if you tread carefully with proper research and practice. The path to gaining success in this field is definitely arduous, but if you keep at it, it will all be worth it in the end.

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Marya Vinget

Marya Vinget is a freelance writer who works for may content writing agencies and for personal blog owners. She loves to write about everything from Tech to entertainment, You can hire her for the versatile writing attitude.