CFD stands for contract for difference. It is a derived product which lets you buy or sell financial instruments without having to own the actual asset. In CFD trading, you will need the help of a reliable broker. Most providers are market makers, which means the market is created by taking the other side of your trade. Most of the retail traders buy or sell small in number which are too small to be traded in the real market.
With CFD, you will have all the different markets with just one account. These markets are bonds, indices, commodities, agriculture, precious metals and cryptocurrencies.
CFDs are riskier compared to stock trading because this instrument is leveraged. The list below are the risks that you must be aware of as you enter the business of trading CFD.
Counterparty Risk
Different from stock trading, CFDs are being traded opposite the broker. This only means that if the broker goes, under, everything else will go along with it. You will not get back any of your money or stocks.
Risk of Losing More
You must set a margin when you trade CFDs to cover the potential losses. Yet, there are circumstances that the market moves so fast that makes you lose you capital, and sometimes, even more than that.
Risk of Premature Stops
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There is a possibility for price discrepancy when you trade CFD, especially if the broker is a market maker. For instance, for every share for Apple, the stock exchange may shoe $100. But, your broker will instead show $101. This means that you may be stopped on trades, which would have not been the scenario if it was traded on exchange.
Aside from the risks, what you must also consider are the costs of the business.
Commission
This is the fixed rate for every transaction which you have to pay every opening and closing of trade. It is normally your trade’s percentage or the minimum value of money between $10 to $20.
Spread
It is the difference between the bid price and the ask price. For instance, a product has an ask price of $95 and the bud price of $94. This means that if you buy it right now, it will be valued at $95. On the other hand, if you sell it, you will get $94. That is a $1 spread, which is a cost.
Holding Costs
This is a charge to your trading account each day that you hold a position. Say, you have $1,000 on your account and you borrowed $9,000 from the broker you chose so you’ll be able to buy stocks worth $10,000. The interest will be charged on the borrowed amount which is $9,000.
Lastly, find a CFD trading broker that you can rely on so you can soundly sleep at night knowing that your hard earned capital will not be put to waste. Make sure to look for a regulated broker and with good support service.
If you are serious about getting better at trading with CFD, make sure to follow the guide and pave your way to success in the market.
