Need to Know Information for CFDs

With the increasing popularity of CFDs, many newer traders and investors are

looking to get started in this arena. However, there are some differences

between this and traditional trading, and new traders often have a number of

questions regarding what they are and how to use them.

What Is a CFD?

CFDs are actually contracts between brokers and buyers for the underlying

asset’s price. The trader will bet on the direction that a price will go, and will

choose the number of shares they want to trade. If they are correct, the broker

will pay the trader the difference between the opening and closing price. For

example, if the difference is $50, and the trader bought ten shares, they would

receive $500 for “winning” the trade. However, if the trader is incorrect about the

movement of the price, they will have to pay the broker the difference.

As you can see, there is the potential for great reward with this type of investing.

However, there is also the potential for great loss if the trader is wrong.

Why Is There an Interest Charge?

When you choose a long CFD, you will have to pay interest to the broker. This is

because you are borrowing money. The amount you are paying for the trade is

on margin, so you are only putting in a portion of the money for the stock. The

broker is taking care of the rest, and they need to charge you interest for this. If

you take a short CFD position, the broker will credit the account with the interest

instead.

Is There a Limit to the Number of Trades?

One of the benefits of CFD accounts is that there is no limit to the number of

trades that you can make. Many traders who are heavily invested in these types

of trades will make a dozen or more trades each hour. Since there is no stamp

duty on these trades, it helps them to keep their costs to a minimum.

Do They Work Better for Short or Long Term Investing?

CFDs are traded on margin, and that means that they are not a great choice for

long-term investing. It’s generally a better solution to trade them in the short term,

as this way you can avoid the interest charges mentioned earlier.

CFDs have some nice advantages to other types of investing, but they are

specialized. Not all traders will benefit from using them. Make sure that you

consider your goals and see whether they will fit in well with your type of trading

or not. If they do, find a broker that offers CFDs and see what is available. As

always, don’t rush into a trade. Do your research and make sure it’s the right

decision.

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