E CFD Trading For Beginners

For the purpose of this discussion we will not assume any previous knowledge of CFD trading, so let’s start at the beginning. CFD stands for Contract For Difference. These trading instruments allow traders to speculate on price movements in markets such as currencies, commodities, shares, indices, and treasuries.

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You’re not buying the actual instrument

Note that you’re not actually buying and selling those instruments. CFDs are what is known as ‘derivatives’, i.e. their prices are just directly linked to the prices of those assets. If you e.g. buy oil CFDs for $100 000’s, and the oil price goes up by 5 percent, you will make $5 000 profit. This is known among traders as ‘taking a long position’ or ‘going long’.

You can make or lose money whether the price goes up or down

If you buy Microsoft stocks for $100 000 and prices drop by 5 percent, you lose $5 000. With CFDs, however, you can make money whether the price goes up or down, provided you get the direction right to begin with.

If you, therefore, expect Microsoft’s stock price to drop by 5 percent, you can ‘go short’ on Microsoft shares, and if the price does in fact drop, you will still make a $5 000 profit. If it should go up by 5 percent, however, you are in trouble. Read the sections on Margin and Leverage, and Stop Losses below.

Leverage - allowing you to win (and lose) big

The concept of leverage means that you can speculate on much bigger amounts than the amount you have available in cash. If a CFD broker allows you a leverage of 50:1, you can trade on financial assets worth $50 000 for every $1 000 you have in your trading account.

If you use that $1 000 to buy $50 000’s worth of CFDs linked to the oil price and that price goes up by 10 percent, you will make a profit of $5 000, or five times your original investment.

Stop losses to protect you when things go wrong

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