Early in the 1990s, London was the birthplace of contract for difference (CFD) trading. Global CFD trading has grown over time to include a wide range of asset classes, including currency pairings, equities, indexes, and commodities. In addition, CFD trading has been expanding in size, making it one of the biggest financial marketplaces in the world today.
The emergence of mobile trading has also enabled investors to trade anytime, anywhere, thus further driving the popularity of CFD trading. Here is a comprehensive guide leading you through all aspects of the CFD Trading app.
What is CFD trading?
A contract for a CFD is an agreement between a trader and a broker to swap the difference in an underlying security’s value between the contract’s start and termination, which is often shorter than a day.
Without holding the underlying assets, contracts for difference (CFDs) are a well-liked method of trading on the prices of stocks, indexes, commodities, foreign exchange, and cryptocurrencies.
Why do people trade CFDs?
Trading CFDs may be right for you if you’re looking for a way to trade rising or falling markets and want to open a position on margin.
High Leverage：Contracts for difference are leveraged products, which means you can control a relatively large position with a small amount of money. CFDs are often offered with more leverage than other traditional financial products by brokers.
Global Access:Most trading platforms offer a large choice of CFDs on many global goods, allowing you to have broad access from a single platform. The available assets include currencies, stocks, commodities, indices, and thousands of products associated with them.
More Flexibility: Shorting or selling stocks has always been a controversial topic for equity traders but with CFDs, there are no restrictions associated with this practice. You can go long or short with CFDs no matter which way the markets are moving. You can buy or sell as you please without worrying about additional costs.
A Small Minimum Deposit Required：CFD trading does not require traders to have large sums of money to open positions. However, it is not advisable to opt for small investments. It’s crucial to have adequate equity to withstand volatility and adverse market conditions regardless of the required margin to open a position. A general rule of thumb is to start trading small sizes with at least $2000 to $5000 and familiarizing yourself with the potential profit and loss swings that could occur.
Mitigate Trading Expenses: Bringing down the cost of trading pays big dividends over the long term.This is one of the key features of the CFD industry, as you normally pay a little spread and maybe a very small brokerage cost. This is in comparison to the large fees of a traditional brokerage, such as larger commissions, data fees, and platform fees.
4 Steps to Become a CFD Trader
Transacting in CFDs is not rocket science, although it still requires some professional knowledge and experience. The following tips will show you the condition&skills you may acquire to help you bridge the information gap.
Learn More About CFDs Trading
Before you officially start CFDs trading, you should be aware of the cost and risk of it.
The costs of CFD trading generally include 4 main parts.
- First, the commission: the broker’s commission, which is usually 0.1%
- Second, financing cost: the cost of buying assets
- Third, spread: the difference between the bid and offer prices at the time of trading
- Last, the overnight fee: a charge for keeping a trade open overnight or all day
As a matter of fact, the actual costs finally depend on the broker you choose. Besides, CFD trading carries risks in the meantime. The risks associated with Contracts for Difference (CFD) trading can be summarized as follows:
- Leverage risk: CFD trading typically involves leverage, which means investors only need to pay a fraction of the total trade value to enter a position. Although leverage can increase earnings, it may also boost losses. If the market moves against the investor, they may incur losses that exceed their initial investment.
- Market risk: The profitability of CFD trading depends on the price movements of the underlying assets. If the market moves unfavorably, investors may experience losses. This risk exists in all financial markets.
- Liquidity risk: In certain situations, market liquidity may decrease, making it difficult for investors to buy or sell CFDs at favorable prices. Under extreme market conditions, situations like “unable to close” or “unable to open” positions may occur.
- Credit risk: CFDs are over-the-counter (OTC) trading products, meaning the transactions are conducted directly with brokers rather than on an exchange. Therefore, if a broker goes bankrupt or fails to fulfill their obligations, investors may lose their investments.
- Volatility risk: Price volatility in financial markets can result in rapid price fluctuations in CFDs, which can impact investors’ trades.
- Holding costs: Holding CFDs may involve certain fees, such as overnight fees, which can affect investment returns.
In one word, there is no destination on the way to learning trading. Many authoritative websites provide learning content and information from time to time, and even live guidance. You can explore further more on the AAA Trading platform.
Explore a Reliable Broker
A CFD is a tradable contract between a client and a broker in which the difference between the original price of the transaction and its value when the deal is unwound or reversed is exchanged. The second and critical stage in CFD trading is selecting a reputable broker. You can choose according to your own operational preference based on the primary factors: usability, execution speed, convenience of deposit&withdrawals. If you have already accumulated some trading experience, you can try Etoro, Interactive Brokers, and IG. However, if you have just begun to trade with a conservative mindset, it will be more appropriate for you to practice on AAA Trading. AAA Trading is designed for all levels of traders, especially those who have just started to try. The usage experience and the operation are easy to master.
Test Without Real Money Via Demo Account
Having chosen one suitable broker, most people may feel like that it’s time to gain millions of profit in the live account, which is under high risk cause you have not fully adapted to the new platform yet. The more reasonable option is to practice the whole trading process via the demo account. Through demo trading, you can not only practice the skills, but also have better insight about the market and the experienced traders on the platform you have already chosen.
Select Your Deposit and Start Trading
The final step is to select one deposit method. This may vary from different brokers. AAA Trading provides users with 9 deposit methods, covering mainstream ways like Payment Gateway, Zota and Skril. With the experience you have acquired in demo trading, you can now start to trade in the live account to gain actual profit.
CFD trading on mobile brings more convenience for traders nowadays. The trading is no longer locked in front of the big computer screen any more. However, since CFD trading carries risk because of leverage and market volatility, you should never stop learning trading knowledge. As said by Warren Buffett, Risk comes from not knowing what you’re doing.