What is CFD trading?

How does CFD trading work?

Before you start, make sure you understand how CFDs work. Never invest money that you cannot afford to lose. Create an account with Actually to stay up to date with the latest market news that will help you identify the best investment opportunities.

Investing in CFDs gives you the opportunity to benefit from both price increases and decreases. If you expect the price of a CFD to rise, you can enter a long (buy) position, or you can enter a short (sell) position if you think the price will fall.

Another advantage of CFD trading is that you can use leverage to open much larger positions with less initial capital. However, remember that using leverage also maximises the size of your losses if the price moves in the opposite direction to your position.

Let's say you anticipate a price increase in gold and decide to open a buy trade for 1 Gold contract at the current price of €2,000. You opt for a leverage of 1:20, meaning you only need €100 of free margin to open this position.

A few days later, the price of gold reached €2,100. You can close your position and earn a profit of €100 on each contract: the difference between the current and opening prices multiplied by the trade volume. However, imagine that a few days later, the price of gold drops and reaches €1,900, opposite to your speculation to buy. When you decide to close the position, you will lose €100, which is also the difference between the price of opening and closing. The respective loss will be deducted from your balance.

What are the pros and cons of CFD trading?

Firstly, CFD trading provides access to a wide range of assets, such as indices, currencies, and commodities, without owning the assets. One of the key reasons why CFD trading is an appealing investment option is its versatility. CFDs enable you to access various financial markets from a single trading platform, including indices, currencies, and commodities. This diversity allows you to capitalise on opportunities in different markets and sectors, enhancing your trading strategies.

Secondly, in CFD trading, you enjoy the advantage of leverage, which lets you control a larger position with a relatively smaller amount of capital. Using leverage, you can potentially amplify profits if the market moves in your favour.

Another appealing aspect of CFD trading is the ability to profit from both rising and falling markets. Unlike traditional investing, where you can only benefit from upward price movements, CFDs allow you to open both long (buy) and short (sell) positions. This means you can potentially profit from market downturns by selling CFDs on assets you believe will decrease in value, offering you additional trading opportunities in various market conditions.

When trading CFDs, you should be aware of the disadvantages. For instance, leverage can increase your risk of significant losses. This underscores the importance of practising sound risk management and trading strategies. There is also a high volatility because the price fluctuates rapidly in a short period, and sometimes it can be hard to predict its next movement.

You can explore CFD opportunities by starting a free demo trading. It doesn’t involve real money risks but still provides you with real market data to learn and test your strategies.

Main trading terms you should know

Here are some basic CFD terms and concepts that you should be familiar with to navigate the market effectively.

• Spread: It's the difference between a CFD asset's buy (ask) and sell (bid) prices. It represents the cost of entering and exiting a trade and is typically expressed in pips. A tighter spread indicates lower trading costs, while a wider spread can impact profitability. Check the typical spreads in Actually here.
• Swap: The interest payment or fee you incur by holding a CFD position overnight. It's also known as an overnight financing fee or rollover cost. The swap rate depends on the interest rate differentials between the currencies involved in the trade and can be positive or negative, depending on the direction of your trade.
• No-spread trading: When trading CFDs without spreads, you can potentially enter and exit positions at the exact market price without incurring additional costs. This can be advantageous if you want to minimize expenses and optimize trading profits.

Assets classes for Actually CFD trader

When you consider asset classes for ActuallyTrader, here are some popular options and their advantages:

• Currencies (Forex): CFD trading in the foreign exchange market lets you speculate on the exchange rate movements between currency pairs like EUR/USD, GBP/JPY, or AUD/JPY. The 24-hour nature of the forex market, with only a 5-minute recess, provides you with ample trading opportunities, and the high liquidity ensures attractive spreads.
• Commodities: CFDs on commodities like gold, oil, silver, and natural gas enable you to capitalize on price fluctuations in the global commodity markets. Trading commodity CFDs can serve as a hedge against inflation and geopolitical risks.
• Indices: CFDs on stock indices, such as the S&P 500, FTSE 100, or DAX, track the performance of a basket of stocks from a particular market. Trading index CFDs allows you to gain exposure to broader market trends and diversify your portfolio.

Conclusion

Let's sum up what we learned about CFD trading.

• CFD trading is a method where you don't have to physically own the asset to take advantage of market price fluctuations.
• Trading CFDs on various assets provides diversification opportunities and flexibility across multiple market conditions.
• Understanding basic trading terms and exploring different asset classes helps you develop well-rounded trading strategies.
• CFDs are typically traded on margin, meaning you don't need to commit the full value of the underlying asset to enter a trade. This makes them cost-effective and accessible for traders of all experience levels.
• CFDs are leveraged speculative products associated with the risk of loss. You must be aware of these risks prior to trading, as you may lose your entire investment. You may also seek advice from an independent trading professional before you start.