CFD is a form of financial trading that is becoming increasingly popular in the market. CFD allows traders to invest in an asset without owning it. Instead, the trader will bet on the price change of that asset. Let’s learn in detail through the article shared by Learn Forex Trading.
What is the concept of CFD?
Although CFD has many advantages, such as high flexibility and low transaction costs. But there are also risks and limitations, such as market risk. Using financial leverage can lead to rapid loss of money. Therefore, to achieve success in CFD trading. Traders need to have knowledge and experience about the market and the factors that affect the price of assets. Furthermore, planning and following it are also important to minimize risks and increase the likelihood of trading success.
CFD in forex stands for Contract for Difference. This is a type of financial contract between a buyer and a seller. In which they agree to exchange different values of a fixed asset (such as currency, commodity, stock) within each predetermined time.
Instead of directly owning assets. Buyers and sellers only bet on the difference in price of the asset during the transaction. CFD is widely used in the forex market as a leveraged trading and investment tool. Allows investors to invest smaller amounts than directly owning assets. However, CFD also carries high risks and should be applied carefully.
Information about the CFD Market?
How large and developed is the current CFD market? Below, Self-study Forex will reveal it to you.
CFD History
Derived from Futures and Options Contracts. CFD were first launched in the 1990s by Smith New Court – a trading brokerage firm based in London. It was then purchased by Merrill Lynch in 1995, for £526 million.
CFDs were originally used to offset the risk of loss from shares traded on the London Stock Exchange. However, when investors realize the great benefits of this financial tool. That only requires a small deposit. There is no need to own property and homeowners can avoid certain taxes, so it immediately became popular and popular, especially with speculators or small investors with capital. not much.
Size of the CFD market
The CFD market has grown at a tremendous rate thanks to the interest investors have in it. Currently, investors can access more than 4000 market products through CFDs. And this number is still expanding further.
CFD legality
As of this article, there are currently 20 countries that accept CFD as a legal form of trading. Including large countries belonging to the EU such as. England, Germany, France, Australia, Switzerland, Singapore… etc… However, each country has its approach to CFD. Even many countries have not yet introduced policies on CFDs.
Although the US has not currently issued any policies prohibiting or approving CFD trading. However, some major countries in Southeast Asia have approved CFD trading such as Singapore and Thailand.
CFD Monitoring
Supervision of the activities of CFD exchanges is carried out by an organization consisting of leading regulatory authorities in major countries. All reputable CFD trading exchanges in the world are authorized and certified by these organizations.
Currently, with the strong development of the CFD market. A series of trading exchanges have sprung up like mushrooms, and many of them are scams that take advantage of investors’ ignorance for profit. Therefore, investors should only trade at reputable exchanges managed by the organizations mentioned above
What are the transactions in the CFD market?
In the CFD market, there are the following types of transactions:
- CFD stock trading: allows investors to buy and sell stocks and securities worldwide.
- CFD currency trading: allows investors to buy and sell currencies. Including popular currency pairs such as USD/EUR, USD/JPY, EUR/GBP, etc
- Commodity CFD trading: allows investors to buy and sell commodities. Including gold, silver, crude oil, natural gas, etc
- CFD index trading: allows investors to buy and sell stock indices. Includes popular indices such as S&P 500, Dow Jones, Nasdaq, FTSE 100, DAX, etc.
These transactions allow investors to seek profits through investing in asset price differences. With different levels of financial leverage. However, investors need to consider and manage risks carefully when participating in trading in the CFD market.
To start CFD trading, the steps can be as follows:
- Choose a reputable trading exchange and register an account: Investors should choose a reputable CFD trading exchange. Licensed to operate and regulated by trusted financial agencies. Then, register an account and verify your personal information to start trading.
- Deposit money into account: After registering an account. Investors need to deposit money into their accounts to be able to perform contracts for different transactions. The amount to deposit usually depends on the exchange’s minimum requirements.
- Choose assets and place trading orders: After having money in your account. Investors can choose the assets they want to trade. Place buy or sell orders based on technical and fundamental analysis of the market.
- Risk management and order closing: Investors need to manage risk by setting Stop Loss and Take Profit to minimize losses. And monitor the market to close orders when necessary.
However, before starting CFD trading. Investors need to have enough investment knowledge and experience to consider and manage risks carefully.
What are the advantages and disadvantages of CFD?
Besides its strengths, CFD also has a few disadvantages. Let’s see what its advantages and disadvantages are.
Advantages of CFDs
As for advantages, CFD has countless advantages such as:
Financial leverage for the ability to amplify profits
Great tool and the main reason why it is so attractive to investors. If used properly, it’s the same amount of money spent. Traders can earn profits up to a hundred times higher than traditional investments.
Access global financial markets from just one trading platform
Most CFD trading platforms offer financial products in all major markets around the world. And allows round-the-clock access to over 4000 markets.
Provides free risk control tools
With take profit/stop loss orders, negative balance protection tools, etc. CFD brings peace of mind to investors
No day trading required
The contract for different markets is not bound by minimum capital requirements. To be able to day trade or limit accounts to day trading like the underlying market. CFD account holders can trade anytime they want and the minimum deposit fee is also very low.
Diverse investment opportunities
The financial products in the CFD market are extremely diverse. With stock CFDs, index CFDs, commodity CFDs, cryptocurrency CFDs… etc… This helps investors have more choices in their investment portfolio.
Low transaction costs
Different from conventional forms of investment. Contracts for different investments do not require stamp duty because the investor does not own the property. Instead, spreads, overnight fees, and commissions are fees that exist and are accepted in CFD trading.
The fee will depend on the customer’s account type for some exchanges or is fixed. However, currently, most of them are quite low compared to other forms of investment because of the huge competition. For example, Mitrade does not even have commission fees, overnight fees and spreads are also very good
Below are 2 main disadvantages that we realized after the trading process in CFD.
Risks when using financial leverage
This tool is a double-edged sword. With the ability to increase profits for investors exponentially. But at the same time, it also entails the same loss rate if they do not use it properly.
This is also the reason why CFD trading exchanges provide investors with risk control tools. To help them limit losses to a minimum.
The legality is not high
The contract for different markets is still in the development stage so control cannot be completely tight.
The reputation of the exchange is mostly based on reputation. Lifespan and financial situation of each exchange. However, now with the intervention of the regulatory agencies mentioned above. Finding a reputable and guaranteed trading exchange is no longer as difficult as before.
See more: How to register ICMarkets broker account
Tips for effective CFD trading
To be successful in CFD trading, you need smart trading tips. If you don’t know, you can apply the experiences below.
Use leverage appropriately
Although financial leverage gives you the ability to make exponential profits. But it also comes with risks if you do not control your capital well. A good tip is to start with a small capital and don’t trade more than 1/3 of your total capital.
Note the trading hours and trading sessions of the day
Each type of product will have its time frame to note such as:
- Forex, Indices, and Commodities CFDs typically trade 24/5
- Stock contracts for differences usually trade based on the trading hours of stock exchanges
- Cryptocurrency CFDs typically trade 24/7
In addition, you also need to pay attention to the time frame of the trading sessions. To be more proactive in your trading schedule.
Always set Stop loss
Never forget to set a stop loss for each of your trades. Because the trading market always has fluctuations that you cannot predict. A stop-loss order will help you minimize losses to your account and keep you in the market. If you trade without placing a stop-loss order, the price you pay can sometimes be the entire amount in your account.
Understand the exchange’s fees
Although most exchanges today have quite competitive transaction fees. However, you still need to understand all the fees of the exchange such as spread fees, overnight fees, and commissions. This will help you accurately calculate profit and loss in your transactions.
Use the trading platform’s utilities effectively
Some large and reputable trading exchanges in the world such as Mitrade, Plus 500. There are very good utilities for investors such as. Basic and advanced investment classes provide knowledge or DEMO accounts for trading practice.
Take advantage of these as they are completely free. And it will help you a lot in the process of learning and practicing trading skills.
Epilogue
So, through the Learn Forex Trading article, you probably know that CFD is a potential but equally risky type of financial transaction. Traders need to have in-depth knowledge of the market and the factors that influence asset prices. As well as making smart choices about financial leverage. And a trading plan to minimize risks and increase the likelihood of trading success.
With the development of technology and the internet. CFD trading has become easier and more convenient than ever. However, the risks and limitations of contracts for differences still need to be carefully considered before deciding to engage in trading.
In short, if used properly. contract for differences can become a useful tool for investing and financial trading. However, beginners need to learn about CFD thoroughly. Before engaging in trading, make sure you understand the risks and limitations of this type of trading.
