In todays’ world when it comes to the stock market, every potential investor and trader should know the term CFD Trading and how it can be an interesting investing option and opportunity towards financial freedom. CFD is an abbreviation for – contract for difference, and this form of trading allows traders and investors to be able to profit from price movement without owning the underlying asset. This is thanks to an agreement between an investor or trader and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.

How a CFD works

The best way to understand CFD trading is by showcasing an example. We will use the example of an instrument such as a stock that has an asking price of 30€, we have the possibility of choosing our position whether we would like to purchase a BUY or SELL depending on if we evaluate that the price will decrease or increase. In this example we believe that the price will increase for this stock so we BUY 100 units which results in the cost of the transaction being 3000€ with the addition of commissions and fees subject to the used CFD broker.

To work out how your position has fared, you simply need to calculate the difference between the opening price and the closing price. If the closing price of the stock is 40€, for example, the difference is 10€. This would result in you earning for every share 10€ which means for your 3000€ transaction you made 1000€ profit on the price difference. The same can be done with a decreasing price. For example, you choose to open a SELL trade on this stock for 30€ because you believe the price will go down. As in the previous example you purchase 100 units in the SELL direction. If the price of the stock falls and you decide to close the trade with the closing price of 20€, for example, the difference is 10€. This would result in you earning for every share 10€ which means for your 3000€ transaction you made 1000€ profit on the price difference.

Advantages of CFDs

The reason CFDs can be interesting and captivating for investors and traders is due to a number of factors such as:

Leveraged Trading

The beauty of CFD trading is that it offers higher leverages than traditional trading. Trading with a leverage allows a trader the opportunity to trade with less capital and still have a lucrative potential return.

Global trading access from one platform

Brokers that offer CFD trading usually offer a variety of products such as stocks from all over the world and with that, access 24 hours a day to different markets worldwide.

A wide range of trading opportunities

CFDs are generally offered with a wide range of trading instruments such as stocks, forex, indices, commodities (such as metals, oil, gas and agriculture), ETFs. This gives a trader an opportunity to diversify their portfolio and risks

Of course, it is important with all the opportunities and advantages offered by CFD trading to understand the risks that are involved. CFD trading is a more fast-moving way of trading than conventional stock trading and therefore requires a more regular monitoring of open trades.  

It is important for the protection of the investor to seek out services from licensed brokers because a license shows us that the broker is regulated by a financial authority that will oversee that the broker does not break the law, mistreat client funds or manipulate with the provided market data.

How to get started with CFDs?

If this article has sparked some interest for you in CFD trading then the first step to explore and start with trading, is to find yourself a reliable and licensed broker. 

A financial broker is a company that is an intermediary between a trader and the market. These brokers forward a trader’s orders and are therefore a trader’s gateway to the markets. 

An example of a reliable and regulated broker

An example of a licensed, reliable and regulated broker for EU citizens is Libertex. This broker is in business for more than 20 years and offers a diverse trading experience. For beginners this can be an interesting choice due to them offering trading not only through a web interface but through a user-friendly and intuitive mobile application that makes it convenient for beginners and professionals to use. 

Once registered, Libertex automatically provides every trader with a demo account which is an opportunity for beginners to peacefully play around and practise on the platform without committing until enough confidence is built up to trade on a live account with real money.

In our opinion, trading has an enormous potential and it is definitely worth it, to look further into this form of investing.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65-80% of retail investor accounts lose money when trading CFDs with the listed providers. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.