What Is CFD Trading? – A Beginners Guide
CFD trading is a relatively new way of investing into the financial markets, having only been accessible to retail investors for the last ten years or so. It is an extremely similar method of speculation to spread betting so if you have experience in placing a spread bet then you shouldn’t have any problems picking up CFD trading.
A Contract For Difference is a pretty self explanatory notion. When you open up such a contract you are basically betting on the value of a financial asset going up or down. If you think the price will go up then you will be the “buyer” in the contract but if you think it will go down then you will be the “seller.” If the market goes for you then the other party in the contract will have to pay you the difference in the opening and the closing price of the agreement. Conversely, if the market goes against you then you will be liable to pay the other party the difference.
What can you trade?
There are many markets open to someone that is interested in trading CFDs. Perhaps the most popular markets are stocks, shares and indices such as the FTSE 100 and Wall Street. Some of the other more popular markets are commodities including oil and natural gas, interest rates and bonds.
Where can you trade?
There are around ten top CFD providers on the market that will allow you to open contracts with them. Some of the most famous include IG Markets, ETX Capital, Spreadco and City Index. Commissions tend to be around the 0.25% mark and you might incur an overnight financing charge for each night that you keep the contract open.
As we can see, Contracts for Difference are a very useful method to use when investing into the markets. They are similar to spread betting in the way that you can bet on an asset increasing in value and decreasing. They also allow leverage which means you can trade on margin or take positions that are worth a great deal more than the sum of money in your CFD account.
What does it cost to Trade?
To open a contract with a CFD provider you are going to be charged a commission that will normally be around 2.5%. In addition to this commission, you will also be charged a spread (the difference between the buy and sell price). Another fee that you should be aware of is the overnight servicing charge that tends to be linked to an interest rate – most commonly the LIBOR rate. It is important that you weigh up the fees involved with Contracts For Difference and compare them to other investment methods such as spread betting and traditional stock investing.
Marcus Holland is the owner of two CFD websites – CFD Trading and cfd.co.uk. Feel free to check the sites out for more information and guides to help you improve your knowledge.