CFDs whose initials stand for Contract For Difference is an agreement between two parties who agree to exchange the difference between the opening price and the closing price of a commodity. Parties involved agree to exchange the difference in the value of a commodity, index or a particular currency between the period at which an agreement is made and the time it is closed. CFDs are one of the world’s rapidly growing trading tools. Should the price of an asset rise, the seller give the buyer cash and the reverse is true. CFDs entry and exit price are not restricted. There are no time limitations either.
Retail traders use CFDs to trade numerous global financial products like commodities, shares, treasuries, indices and currencies. The following are 5 Best Quora Answers on CFDs:
What are some of the CFD trading platforms?
There are many online trading platforms for an investor to choose from. However, finding the right CFDs trading platform depends on the way you trade. Although some of the platforms are not trustworthy, there are still those that offer what they promise and traders are confident to use because they are secure. One can buy CFDs from known brokers like CMC Markets, IG Index, City Index and plus500.
Can trading in CFDs yield big profits?
An investor can trade with CFDs to increase profit margins. However, CFD trading has risks, especially when dealing with a highly leveraged product. When trading with CFD’s profits are not guaranteed. This is because there is no consistency in the profits you make. This factor is attributed to the fact that sometimes you lose while other times you win since earnings are based on speculation.
Is CFD trading like gambling?
The answers to this question are two. Yes and no. Yes because, if you invest in a product you do not comprehensively understand you are gambling. No, because it involves speculating if the price of a commodity will go high or low. It is more like gambling because, in the long run, companies that offer CFD trading end up making a lot of money.
Trading excessive levels of leverage qualify CFD’s trading as gambling. Trading CFDs at ten times you total account value is equal to gambling and, to say the least, financial suicide. Again, if you start trading with huge amounts of the money puts you at a great risk because CFD’s trading requires you to start small and progressively build up.
Are there risks involved in CFDs?
Trading in CFDs is not an excellent trading option for everyone. There are risks in losing even the money you initially invested. Before one decides to trade with CFDs, it is pivotal that they seek independent professional advice.
What are the aspects I need to consider before I start trading with CFDs?
a) Leverage: When placing an order, an investor deposits a particular percentage of the total value of the position. This deposit is referred to as position margin. For example, if a trader buys CFDs worth $1000 with an applicable margin rate of 5%, they will pay a positioning margin of $50. Your capital will suffer from any move in the market, and you lose your initial investment.
b) Account close-out risk: To ensure your account does not get closely, you must deposit sufficient amount to cover the margin requirements throughout. In case you do not meet this stipulated requirement, your positions will be closed. This means that your account needs close monitoring from time to time and consistently deposit additional money so as to cover the total margin requirements.
c) Costs: The positions you hold and the period you hold them to determine if you are going to incur holding costs or not. The holding costs apply when you hold positions on particular products overnight past 5.00 PM. Holding costs significantly reduce your profit and increase your losses. You must top up your account so that you have enough funds to cover holding costs.
When holding costs are allowed to accumulate, the account owner risks losing more than the deposits initially they have made. These three aspects require an account to have sufficient funds to avoid closure of positions. The above 5 best Quora answers on CFDs will provide you will all the detailed information before you consider investing in CFDS and opt for the best trading platform and practices.