Stock trading is trendy and lucrative, but entry may be prohibitively expensive. For example, the legal minimum capital requirement in the USA is $25,000. Fortunately, there is a better and cheaper way to access the market. In India, CFD trading is on the rise. It allows investors to benefit from different assets without owning them. Here are the fundamentals of the system.
What Are CFDs?
This abbreviation stands for Contracts for Difference. They are derivatives — i.e., instruments connected to certain assets. For example, the price for CFDs on crude oil relies on the value of crude oil itself. CFDs rise and fall in line with the assets they represent.
Rather than investing in actual shares, you may purchase CFDs connected to the same securities. You will buy low and sell high, following the basic logic of trading. The broker pays the difference between entry and exit. In essence, you are betting on whether the price for the asset will rise or fall.
CFD trading is a popular method of financial diversification. Any expert will advise against focusing on a single market. Step by step, you should diversify exposure, engaging multiple instruments — ideally, unrelated. This way, when one market underperforms, you will cover the loss easily. Contracts for Difference may be derived from the following markets:
- stocks of the largest corporations like Apple or Amazon;
- cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc.;
- commodities like crude oil, wheat, natural gas, etc.;
- market indices like FTSE 100, S&P 500, Dow Jones, etc.
If you are already trading currencies, it is easy to expand. You may be able to buy CFDs using the same live account. This depends on your brokerage, though. The simplest types, such as cent accounts, are only good for currencies and spot metals.
CFDs are normally included in more advanced categories. For example, the Forextime Standard Account opens access to 14 CFDs and requires just $100 to begin. It is incomparably lower than the entry threshold in the stock exchange.
These derivatives are traded via popular Forex trading terminals, such as MetaTrader 5. For currency traders, learning is quicker. They are familiar with the interface and analytical features. CFD operations may also be delegated to experts via copy trading.
Basically, if you understand the fundamental logic, CFDs are easy to master. However, beginners should be extra careful with leverage. CFDs are often traded on margin, and the ratio may be substantial. While this could magnify profits, it also exacerbates the risks. You may wipe out your balance with one reckless move.
To make forecasts, traders analyse data for their underlying instruments. For example, if you are knowledgeable about the oil market, you may profit from the dynamics of Brent or WTI. Unlike futures, CFDs are not linked to physical delivery. All you do is speculate on the price, which makes it more convenient by definition.
Choose the markets you understand best, and turn knowledge into cash. The same logic of buying low and selling high applies to any other instrument. The Stop Loss trigger allows you to have trades executed automatically. Provided you use leverage wisely and risk no more than 1% of capital per trade, CFDs are potentially lucrative.
Leverage: Pros and Cons
This system boosts the buying power of a trader. For example, with a ratio of 1:100, one may trade $10,000 worth of CFDs when there is just $100 in their account. Surely, you may earn 100 times more than you would otherwise. However, potential losses will also be tremendous. When you work through a broker without negative balance protection, you will end up in the red.
If you take the gamble, make sure this measure is in place. However, if you flawed your strategy, you would never lose more than you deposited. Reliable brokers serving millions of clients protect them against going negative.
The financial analysis must be laser-focused, particularly when using borrowed money. Hence, beginners are urged to steer clear of leverage until they gain experience and competence. CFD traders should begin with a demo account to build the necessary skill set.
Trade on the Go
There is a software product for any computer or mobile device. The same terminal may be accessible from a tablet, smartphone, and laptop. This convenience is known as cross-platform functionality. CFD traders switch between devices during the day and even work on the go.
Overall, CFD trading is a risky undertaking, but it is also profitable and rewarding. With a single instrument, you can engage multiple markets to diversify profits. Thanks to advanced mobile apps, users monitor the market at a glance, wherever they are.