CFDs are a very popular and user-friendly way to trade in financial markets.。Becoming a successful trader requires learning and developing a range of new skills, and understanding what CFDs actually mean is an essential first step。

What is CFDs?？

In CFD trading, each trade made by an individual is an agreement between the individual and the broker he or she uses.。

If you buy an asset (such as gold or Bitcoin) and the price rises, the "difference" between your entry price and the exit price will represent your profit。A loss if the price is against you。

How CFDs work？

CFDs involve a broker monitoring the price of an asset in a real market and offering you the opportunity to sell or buy that asset。If you buy and the price rises, you make a profit; if you sell and the price rises, you lose money, and vice versa。

The platforms offered by the top brokers are user friendly and equipped with a wealth of tools and learning materials to help you develop your trading skills。The monitor has real-time market information, so the price of your position matches the price of the underlying asset。

The data feeds are all automated, and you can observe the dynamics of the world's financial markets in real time, just like trading in the real market。CFDs are just a tool that provides a simple and convenient way。

CFD Trading Example

Examples can best understand the mechanics of CFD trading, as follows for your reference。

Step 1

Log in to the trading platform and enter the trading console。The analysis shows that the tech bull market continues, so buying units of the Nasdaq 100 (NAS 100)。

Click on the market of the NAS 100 to enter the console, which shows the price chart, volume, and the "Buy" and "Sell" buttons on the trade execution sidebar。

Buy 10 lots, enter the number into the required data field。Click "Buy" to start trading, we can see the profit and loss of the position start to change。

Step 2

The gain or loss on this NAS 100 CFD position will be calculated using the following formula.

Profit and loss = opening price + / - real-time price x size of shares held

= 12067.2 + / - live price x 10 lots

Suppose the price falls to 12055 shortly after opening a long position in the NAS 100..4, the position shows a negative gain or loss of -110.$80。Calculated as follows: 12067.2-12055.4 x 10。

Your CFD position will continue to post real-time unrealized gains and losses。

Step 3

About an hour after the first trade, the market moved favorably。The price at which the position can now be sold is 12147.6, converted to an unrealized gain / loss balance of more than €600, using the closing price provided and exiting the transaction。

Locking up some profits is never a bad idea。Sale of 10 lots of NAS 100 ensures realized profit of 613 euros。

After closing the transaction, the cash balance increased by 613 euros to 10,613 euros, the market risk was reduced to zero, and there are now no vacant positions.。

Key advantages of CFD trading

Buy or sell markets - traditional buy-and-hold strategies involve holding positions in assets - for example, buying BT shares and selling them later。With CFD trading, you can sell short - so if you think Tesla's stock is overvalued, you can sell today and buy back at a profit when the price falls。

Suitable for modern online trading platforms - the digital revolution sweeping the investment industry makes trading from desktop and mobile devices as easy as clicking a button or touching a screen。CFDs are very simple and perfectly integrated with this new approach。

CFDs can save tax - depending on the country you live in, but you may find that by using CFDs, you can avoid transaction taxes。

Can be used to trade any market - since you have a contract with a broker on the "underlying" asset, it doesn't matter what the asset is, which means the entire market can be traded in the same format。If you switch from CFD stock trading to CFD cryptocurrency trading, you don't need to learn new skills, the basic principle is the same。

It's very simple to use - the contract you sign with your broker covers all of your trading activities, eliminating the need to sign a new agreement every time you trade。This means that no matter what market you choose, you can trade as often as you like。

Key Risks of CFD Trading

The price of the CFDs you trade will fluctuate up and down based on the price of the assets they represent.。If you hold a long position in oil CFDs and the price of crude oil on the exchange falls by 5%, the value of your holdings will also fall by 5%。There are other risks worth considering:

Market risk - CFDs are a user-friendly way to trade the market, but they don't help if your initial decision is wrong。If the price moves unfavorably, then you suffer a loss。

Unlimited losses - CFDs are complex instruments。For example, a short sale means that your trade has unlimited downside; the price may not be conducive to your rise - up to infinity。Although this is unlikely to happen, it affects the psychology of traders, and the "short run" caused by rising prices may cause them to cut their positions.。

Operational Risk - Your position in CFDs is relatively easy to access and understand。But there is always the risk of "mishandling" trade orders, so it's best practice to check your trades frequently to make sure you're doing what you want。

IT risk - access to online trading accounts requires a secure and reliable internet connection。Some brokers have "trading desks" that can be reached by phone if the internet fails。In fact, if you want to trade in the market, it is best to operate within a good technical framework。

Leverage risk - CFDs allow traders to expand their risk-reward ratio。You use the investment as trading margin, and the size of the transaction is larger than the direct purchase of assets。Trading with leverage is risky.。

Counterparty risk - any contract relies on both parties performing their respective agreements。If you make a profit on the trade, you are still at risk of the broker not paying。This is counterparty risk and there are ways to mitigate it。

Is CFD trading safe?？

There are many possible ways to lose money when trading CFDs.。Market risk is inevitable, leverage will multiply any losses, and you may get the basics of booking transactions wrong。

A very important risk that stands out from the above list is counterparty risk。Opening a position in a CFD trading account means that you have established a contract with your broker rather than a direct investment in the market, which explains why CFDs are derivatives。The price of your position is derived from the price of the underlying market.。

All CFD providers will insist that you deposit funds with them before you can use CFD products for real-time market trading。If the trade fails, they automatically deduct it from your investment account。

However, the broker will not deposit funds into your account in advance to ensure that you get paid when the trade is successful。This means that much of the protection for individual traders depends on the approach of regulators.。You should pay attention to the following points:

Fund segregation - your funds are held in an account at another bank, not in the broker's name。

Financial Services Compensation Scheme - Government-backed cash deposit guarantee up to a certain amount。

Negative balance protection - your loss cannot exceed your initial principal。

Good Reputation - Make sure the broker is in good standing and tracking history can help you identify。

Stock market listing - If the company you use is a listed company, you must comply with the rules and regulations of the exchange。

Learning Professionals - Both the pension fund and the family office have designated teams whose role is to inspect and monitor third parties。You should also strive to ensure the safety of your funds。

Regulatory situation

CFD brokers licensed to operate by any of the following Tier 1 institutions must comply with a set of rules and regulations designed to protect their clients。

Financial Conduct Authority (FCA)

Cyprus Securities and Exchange Commission (CySec)

Australian Securities and Investments Commission (ASIC)

Terms you need to know

Underlying asset - the asset used to obtain the price of your CFD position held at the broker。
Exposure - The size of your CFD position, which is the cash value of a particular asset you hold.。
Leverage - the size of the margin-related exposure。If you deposit $5,000 and buy $10,000 in bitcoins, the leverage is x2。
Leverage Ratio - The above positions are expressed in the statement as a 1: 2 leverage ratio, and most brokers allow the leverage ratio to be adjusted according to client preferences。
Margin - the amount of capital you need to hold a leveraged position in a CFD, and any leveraged trade is traded on margin.。
Margin requirements - If the price of your leveraged CFD position generates an unrealized trading loss, the broker may ask you to invest more money if you want to continue holding the position.。
Closing - If you are unwilling or unable to deposit more funds to meet margin requirements, the broker will sell your position at some point so that you do not take trading risk。
Gains and Losses - Profits and Losses on Your Trading Positions。
Unrealized profit / loss - profit / loss on open positions, calculated using the difference between the entry price of the trade and the real-time price。
Realized profit / loss - profit / loss on closed positions, calculated as the difference between the entry price of the trade and the exit price of the trade。
Balance - The amount of money you hold at a broker, also known as equity, is the cash you will have after you sell all open positions。Calculated as initial deposit - cash used to make open trades + value of open trades + / - realized gain or loss。
Go long - trade with cash in your account and buy CFD assets you don't already own。
Short - Use the cash in your account to trade and sell CFD assets you don't already own.。
lots - trading units for certain assets。
Overnight Fees - Fees charged to your account based on leverage。Fees associated with borrowing money from a broker to hold larger positions than your funds allow。
Dividends - As with stocks, you can receive dividends if you own a CFD and hold it the day before the ex-dividend date。
Mark-to-market - the process of ensuring that the price of an asset held in the form of a CFD follows the price of the underlying asset traded on an exchange.。

Leverage in CFD trading

The risk associated with leverage may be that your purchase (or sale) is more than you can afford。

A non-leveraged transaction involves exchanging a certain amount of cash for the same amount of assets, for example, buying $500 worth of Apple stock。

Using 1: 5 leverage means buying $2,500 of Apple stock, but using only your $500 as margin - a position deposit。If profits change quickly because leverage is part of the trade, the broker still has your $500 as margin。

In a leveraged situation, any price change will have a 5x impact on your profit and loss。If the price drops by 10%, you will lose $50 in the first example and $250 in the second example。

In cash terms, a leveraged trade will cause the price of the underlying asset to fluctuate by 10%, but your funds will take a 50% hit。Your balance will drop from $500 to $250。

CFD Trading Skills

Stop Loss Orders

Stop loss orders are automatic orders to close positions, you can manage the risk and reward of your trades without staring at the screen all the time。

If there is a certain loss, the stop loss order will sell the position and the take profit order will close the position and lock in the profit.。You can decide whether you want to use these and their price level。

Demo Account

After finding the right broker, you may be tempted to start trading directly, avoid the temptation and start practicing on a demo account first。Even experienced traders use demo accounts when testing new strategic ideas。Managing your cash balance is essential, it is recommended for beginners to start trading with virtual funds, it provides the opportunity to eliminate operational errors and trading errors。

CFDs and Taxes

The contract for difference (CFD) was invented in the 1990s as a means of allowing traders to enter the market more efficiently.。In the UK, Stamp Duty Reserve Tax (SDRT) is a fee levied on the purchase of shares and is calculated as 0% of the value of your position..5%。

Much depends on the country you live in。However, one of the advantages of using CFDs instead of traditional methods to buy shares is that sometimes SDRT fees are removed from your income statement。

CFD Trading Strategies

Now that you have mastered the mechanics of CFD trading, it's time to develop an effective trading strategy。As you might imagine, there are countless ways to trade the market, some of which are:

Scalping - short-term, frequent trading designed to take advantage of small price fluctuations。
Intraday trading - no overnight positions。One of the benefits for CFD traders is that there is no need to pay financing fees。
Range trading - buying and selling as prices fluctuate in the general direction。
paired transactions - selling one asset and buying another - which allows for a certain amount of market neutrality。
Trend tracking - CFDs can be used to achieve long-term investment objectives, medium- and long-term positions designed to follow market momentum。
Fundamentals - taking a position based on the true business qualifications of the asset。
Carry trade - popular among forex traders, trading currencies based on the level of interest rates。
Technical analysis - using historical price data to predict future movements。
Documentary trading - taking the trading decisions of other traders and applying them to your account。
Social trading - drawing extensively on the ideas of others and then trading on your own。

The key to strategy selection is to find the right strategy for you, different strategies require different skills, and some strategies will take up more of your time。It is worth researching different methods and is best done in a demo account。

Best CFD Trading Platform

CFD trading has certain advantages, some of which are specific to the way CFD financial instruments operate。The risk of loss is also high, so choosing a suitable broker is even more important。

Price will be a consideration, but some brokers offering stealth fees offer little else。Education and research materials are important if you want to make the most of your trading。

If you want to trade on the move, you can choose a broker that offers high-quality mobile applications。

Brokers offering trading signals as well as trading entry and exit points are particularly popular with beginners。

It is possible to find a broker that meets all the criteria。The list will help you find a regulated broker that offers a quality platform, excellent customer support, useful research and cost-effective pricing。