Let's start with a CFD term. CFD stands for a contract for difference; it is a derivative product that allows for trading the asset's price movements without ownership of the asset. The CFD price is the price of the security you trade.
If you are familiar with Forex trading, CFD trading is the same - traders open positions based on their price predictions and either succeed if the forecast works or bear losses if the projection is wrong. CFD trading is available for a wide range of financial securities, such as stocks, commodities, indices, futures, etc.
How the CFD Market Works
The idea of CFD is that you can trade security without owning it. For instance, if you buy commodity CFD of oil, you don't own barrels of crude oil - you can only potentially profit or lose funds from price speculation. So, you forecast a price direction based on fundamental and technical analysis and place a buy/sell order.
- Leverage. When investing, you need significant funds to purchase stocks, for instance. But trading a stock CFD, you can start with $100 as CFD is a leveraged instrument. Just to remind you, leverage is a ratio of a sum you have to open a trade and a sum you use when opening a trade. Leverage raises the funds you can use to open a position. For instance, if the leverage is 1:100, you have $10,000 to open a trade vs. $100 of your own funds.
- Margin. Another term you should be aware of is the margin. Margin is an initial investment used to open a position.
As with any similar financial endeavor, CFD trading includes expenses. Here are some terms that explain expenses you bear when trading CFDs.
- Swap. Trading CFDs, you don't have to close a trade within a day, keeping it open as long as your funds allow you. Still, you may have to pay an amount for holding a position open. It's a swap. However, the swap isn't always a sum you pay. It can be a sum you get for holding a trade overnight.
- Spread is a commission you pay to a broker for executing your trade. Spread equals the difference between the ask and bid prices.
A great feature of CFD trading is that it’s tax-free.
The CFD trading is done via brokers. You can open a position either on a MetaTrader or broker's own trading platform. The platform used for Forex trading is available for CFD trades.
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