Being new to the market, you surely have a lot of questions in your mind. You might be wondering if trading CFDs is for you and still doubtful if you are fit for this industry. Answering some of the most frequently asked questions (FAQ) about CFDs will give you an idea of whether to pursue trading or not.
What is CFD?
Contract for Difference (CFD) is a popular derivative instrument where you enter a contract with a CFD broker and agree to pay the difference of the buying and selling price of a particular asset. To earn in CFD, you have to speculate on the price of the underlying asset. There are different markets that you can trade within CFD. These markets include futures, stocks, indices, bonds, Forex, and cryptocurrencies.
Why do you trade CFDs?
There is a bind on the price of the financial product in the future and Contract for Difference but the trader does not have full control over the underlying asset. If you go on with traditional stock trading, you will first need to own some stocks of the company and become a shareholder before you can enjoy the privilege of speculating the rise and fall of prices in the stock market. This isn’t the case in CFD trading.
In CFD, the profit or losses that you get depends on the rise and fall of the stocks. You don’t need to become a shareholder to do so.
What are the benefits of CFD trading?
There are five main benefits of trading CFDs. The following are,
- Since you do not own the company asset that you will be trading, you don’t have to pay for the Stamp Duty.
- You can trade CFDs in both directions; either you go long or go short.
- For a single CFD broker, you can trade all the financial products that you want to trade – Forex, Futures, Indices, and a lot more.
- Leveraged trading is allowed. Just with a small amount as a deposit, you get to open a lot of positions from different financial products.
- You can use small funds and diversify your options to minimize the risks of trading.
What are the risks when you trade CFDs?
In trading, you get to enjoy a couple of benefits, but you also have to face the risks along with it.
- The loss of capital if the asset’s price moves in a direction unfavorable to you.
- You could suffer forced liquidation.
- Price fluctuations are frequent.
- You get subjected to counterparty risks.
- Too much leverage could harm you.
Is anyone suitable to invest in CFDs?
Knowing that you can trade leverage just with a little capital doesn’t mean that you will become successful without effort whatsoever. Remember that CFD products are highly risky and you can wipe out your trading funds including your capital if you enter a trade hastily.
Are CFDs ideal for long-term investments?
Unfortunately, CFD is not suitable for long-term investment because of the overnight fees that it charges for every extended period of open trades you make.
