CFD (Contract For Differences), an arrangement made in financial derivatives trading, the differences in settlement between the open and closing trade prices, are cash-settled. CFD Trading for Beginners helps you learn to buy and sell the following:
- forex
- shares
- indices
CFD is a type of financial derivative that allows you to go short and long on thousands of different markets without taking ownership of physical assets. Rather than buying and selling the underlying asset, you can guess its price movement, which means you can speculate in sequence:
- host of different assets
- from shares to indices
- to commodities and more
All these are possible without needing to open accounts with many different brokers.
How does CFD trading work?
CFD trading works by using contracts to mirror prices of financial markets, such as:
- Share
- Index
- Currency pair
When opening a CFD rate, you agreed to exchange the difference in price from opening your position to when you close it. The name CFD works when:
- When buying a CFD, you make a profit when the market rises in price, while making a loss when the price falls.
- When selling a CFD, you make a profit when the price of the market falls, while upward movement led to a loss
The size of your position is dictated based on the number of CFDs you buy or sell. For example, buying an Apple CFD is equal to investing in an Apple share. So, buying 1000 Apple CFDs is the same as buying 1000 Apple shares. For closing a CFD trade, trade in the opposite direction from when you have opened it. When you buy a single Apple CFD at the beginning, you would sell a single Apple CFD to exit.
Example of CFD trading
In the case of buying oil, here are two situations:
- You are buying IS oil CFDs at 6879 when oil is at 6878/6879. Each CFD earns $1 for each point that oil rises in price
- US oil rises 40 points to 6898/6899, so you will be selling five oil CFDs at 6898 to close.
Closing CFD trade means exchanging the difference in the price of an asset from when you opened it. The market moved 20 points in your favor, so you are making (40 x 5 CFDs) $160.
But, if oil moved 40 points against you, you should pay $160.
Now, you have an idea of how CFD trading works and how you can deal with this kind of trade in the market.
