Why Should you Trade with a CFD?

in Trading

Why should you trade with a CFD?

More and more private investors have taken an interest in the financial markets.  Everything from forex to stock trading has caught the eye of traders, but traditional routes into trading usually require a large initial investment that puts some people off.

One of the benefits of CFD (Contract For Difference) trading is that you can trade on a position much higher than you initial investment.  This is because a CFD is a geared product.  You are predicting the market’s movements rather than owning any asset on the underlying markets.

This also provides you with the opportunity to benefit from market movements in both directions.  Traditional trading methods, such as purchasing shares, would only benefit you if the price of the asset increased, due to you owning the asset.  With CFD trading, however, you only predict the market’s movements.  This allows you to potentially benefit from the falling value of an asset.  However, it is important to remember that, because of the geared nature of CFD trading, the amount you could lose is also greater than conventional share trading.

The process of opening a contract helps to explain how this is possible.  Prior to opening a contract, you decide as to whether you will go ‘long’, where you believe the value of the asset you’re trading on will increase, or go ‘short’, where your belief is that the value will decrease.  To go short, you ‘sell’ at the bid price a CFD provider quotes to you.  To go long, you ‘buy’ at the offer price and closing the contract requires the opposite action taken at the beginning.  Your profit or loss margin is determined by the difference in value of the asset at the beginning of the contract compared to the end of the contract, multiplied by how many contracts you opened.

CFD trading is widely available on many of the financial markets, including forex, indices, shares, bonds and commodities.  It is worth remembering, however, that each one of these markets has a great number of factors that can have an impact on market value.  Equally, due to the geared nature of CFDs, your potential for loss can exceed your initial investment and so it pays to know as much as you can about the markets before you trade.

IG Markets aim to educate you as a trader both before and after the moment when you open a CFD account.  They offer free market analysis and online seminars to teach you about what changes the markets, as well as what is changing in them.  Furthermore, they offer you the chance to open a demo account with them first, which allows you to trade with a virtual currency; allowing you to test the markets before investing in them.

The above information should not be taken as financial advice.  Please consider the Product Disclosure Statement available from IG Markets.  Please note that CFD trading can result in losses that exceed your initial deposit.  You do not own or have any interest in the underlying asset.

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Eleanor Rayner has 7 articles online

Eleanor Rayner is a financial writer who specialises in CFD Trading.  She recommends that you open a trading demo account, as well as looking out for her other articles on a variety of subjects, such as forex, commodities, shares, stocks, bonds and options.

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Why Should you Trade with a CFD?

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This article was published on 2012/05/11