CFD Trading: A Quick Intro for Newbie Traders

The CFD market is one of the fastest-growing markets in the world. The global CFD trading volume has already reached $1 trillion in 2020 and is expected to go even higher in the coming years.

eToro is among the most popular brands that you would possibly hear when it comes to CFD trading. What makes this broker different from the rest is that they have a unique platform where you can not only trade on over 3000 markets but also copy the positions of other traders as well. If you’re a beginner and would like to know how to use eToro then you can read a number of great tips and guides first from Wikitoro.org. This is a detailed wiki site where you can find lots of helpful information about this CFD service provider.

What is CFD?

CFD or “contract for difference” is an agreement that you have with your broker on the price of an asset at some point in the future. The price of the asset moves up and down, and the gain or loss on your trade is adjusted according to these changes.

These are derivative products which allow traders to trade on the price movements of underlying assets without actually owning them. Basically, it’s about speculation; it doesn’t give access to an underlying commodity or stock or any other kind of security that’s traded on the market.

It means that you don’t need to own the instrument that you are trading in. This can be a very attractive proposition to investors who want to get into a market without the hassle of having to buy and store physical assets like gold, silver and crude oil.

Advantages of CFD Trading

This form of derivative offer a number of advantages – many people trade them because they do not require a large initial deposit, and it is easy to trade with leverage (i.e., you only need 1-5% as collateral).

Another main advantage of trading CFDs is that there are no restrictions on shorting, buying on margin or hedging against price movements. This means traders can trade in any market condition, 24 hours a day, 5 days a week.

Trading CFDs is different than trading stocks, for example. A trader can look at a stock and buy a certain amount of shares with the hope that the value of the shares will go up. On the other hand, a trader can look at a CFD and make a trade on whether or not it will go up or down. If for instance, you think that Apple shares will increase in value, then you can buy CFDs on Apple shares with the hope that it will increase in value.

It is therefore important to conduct research before one decides to trade CFDs as they are not as straightforward as buying stocks from an online broker.

Types of Products

There are different types of “products” that can be traded using CFDs, like commodities, indices, and crypto currencies.

Forex: Forex or Foreign Exchange trading is one type of investment that leverages the global currency markets to increase profit margins for traders while also limiting risk.

Commodities: Commodities refer to raw materials like gold and silver, oil and natural gas, wheat and corn.

Indices: Stock indices allow you to invest in the stock market without needing to buy shares in individual companies. They reflect how a number of stocks work together and it’s called an index for this reason.

Crypto: Also known as cryptocurrencies, it is a digital currency that can be used as a way to pay for things without the need for a bank, but it has some security risks as well. Crypto is decentralized, meaning that no one person or company controls the currency.

Stocks: A stock is a security representing ownership of a fraction of the company. It provides shareholders with an income or price appreciation.

CFD VS Futures

CFD trading has become well-known in the last few years. The use of CFD or Contracts for Difference is an agreement between the trader and the brokerage for future delivery of a given asset, at a specific time and price.

However, CFDs are not to be confused with Futures contracts, because Futures are standardized securities traded on futures exchanges that oblige the seller to fulfill the contract by delivering it on an agreed date.

The main difference between these two types of contracts is that CFDs don’t oblige you to deliver on any date and time, but rather on a specific market price close.

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