What is Contract For Difference? Is it really profitable even for first-time traders? CFDs allow you to speculate on the movement of market prices of your chosen underlying asset. This is all made possible without the need to own the underlying asset. Contract for Difference are leveraged products and can be traded through over-the-counter transactions alongside a security firm or a CFD broker. It is also a Specified Investment Product (SIP). CFD is not just for currency trading, it is also available for commodities, shares, and bonds.
How Do CFDs Work?
There are two things that happen when you trade CFD;
First, you open trade through a CFD broker. Then, this opens a position in CFD and you can choose to close it in the future when the price reverses.
If you had a buy or long position as your first trade, the second trade should be a sell position. But in contrast, if the trade you opened is a sell or a short position, then you can close the trade with a buy position.
Understanding Long Positions in CFDs
‘Going long’ in CFD is the buying of a position hoping that it will increase in the future. This means that when a trader places a ‘long position’, he believes that the price of the underlying asset in the market will rise. This is such a common way of profiting in CFD. The trader expects that the value of the underlying asset will increase in the future.
If your predictions are correct, the CFD provider will pay you the difference between the opening and the closing price of the CFD. But if your predictions are incorrect, you get to pay the CFD provider with the difference between the opening and the closing prices.
Understanding Short Positions in CFDs
‘Going short’ is the opposite of long positions in CFD. If you go short, you expect to profit from the decline of the price of your underlying asset. This time, you expect the prices of your underlying asset to fall before using a buy order to close your positions.
The pay for the difference in short positions is the same as with long positions. The losing party will have to pay the difference between the opening and closing of the position.
How Much Can You Lose in CFD Trading?
Trading is a leveraged product. Although there are a couple of advantages at hand, there are also disadvantages that when handled incorrectly, could completely ruin your trading capital. CFDs expose you to higher gains but also the risks are doubled. Leveraged products may let the trader lose more than the amount he invested but this depends on the positions that were taken.
Investors pay an initial amount called margin to open a position and start trading. The trader then needs to maintain a particular amount of margin level for the open positions to maintain open always. Remember that you might receive a margin call that will require you to fund your account at very short notice, particularly during volatile markets. If you fail to fund your account after a margin call, then you may risk your open position at a loss.