CFD trading is essentially about deciding whether you think a share price, or a commodity, will go up or down in value in the future and then backing your judgement.
A CFD or contract for difference is an agreement to exchange the difference in value of a financial instrument between the time at which it is opened and the time at which it is closed. Your profit or loss is determined by the difference between the price you buy at to the price you sell at, multiplied by the amount of contracts you hold of course .
How does it work?
For every financial instrument the provider will quote you two prices, the bid and the offer price. If you think the value of a particular financial instrument looks set to rise then you would buy at the higher (offer) price and sell at the lower (bid) price.
Put simply, you would ‘sell’ (go short) if you think the share price of Barclays likely to fall or ‘buy’ (go long) if you think it more likely to rise. The degree to which the market moves in the direction you predicted will dictate how much money you make or lose.
What are the advantages?
Greater leverage. CFDs are margined products, allowing you to benefit from increased leverage. By paying a small deposit you can take a much larger position than you would if you were trading the actual instrument in the market. While trading CFDs can result in magnified profits it also means that losses can be substantial too, which makes it crucial you manage your risk sensibly.
Access to a wide range of markets. The range of markets you can trade CFDs on is extensive and similar to what you would expect if you were using more traditional methods to trade; from forex trading to shares to indices. They also offer some unexpected ways of taking advantage of the financial markets like the always exciting binary trades. .
Direct Market Access. With CFD trading it is possible to benefit from Direct Market Access which means any contracts you open will go directly to the stock exchange and will be at the underlying market price.
Considerations when choosing a provider
It’s a good idea to choose a provider who will help you become a better trader whatever your level of knowledge and expertise.So look out for research and educational resources such as online seminars and expert market analysis.
Try to ensure that you choose a trading platform that offers fast and accurate execution of trades and is reliable.
IG Markets is one of the leading CFD providers in the UK, they offer free daily forex commentary, expert analysis and also a free demo to help you get used to their trading platform. Visit IG Markets today.
