Contract-for-difference or CFDs is a popular trading alternative to traditional investments because it can help investors double their profits or may increase losses as well. CFD trading has gained popularity as brokerages offer negative balance protection to limit losses so investors can save their accounts from debt.
Before going further into CFD trading, one must know what is CFD trading, its advantages, long-term impact on your trading portfolio, and more. You can trade CFDs with great leverage and open a position with a certain percentage requiring less capital.
For example, if you want to open a $1000 position, you can allocate only 5%, which is $50 to the investment. You can use the other $950 for other positions and that is how you can keep your funds and utilize them for more. Investors can read a NAGA review to gather more about the platform and CFD trading prospects.
What is CFD trading?
The meaning of CFD is contract-for-difference which is the process of buying and selling CFDs. They are derivatives that help investors speculate financial markets like commodities, forex, and shares without taking ownership of the asset. If you want to trade CFD, you will exchange the price difference of the asset from the contract opening to when it closes.
Also, one needs a CFD account before they start trading CFDs and the broker also needs to know about the customer before offering the special account to them. NAGA reviews provide you with complete information about the platform to understand how to trade successfully.
Why should you trade CFDs?
CFDs have gained the attention of global investors because of their short trades and leverage. However, here are a few reasons to trade CFDs now and in the future.
- Keep Your Capital - CFD trading involves leverage, using which one can open positions without paying the total value of the asset. Also, the leverage percentage is low, so you can keep your capital invested through other positions. The percentage you pay to open a position is called the margin that can help you speculate market prices without buying them.Plus, it is important to understand that your profit and loss will be based on the full value of the asset, and when the prices move against you, you may lose a significant amount of your margin. For this, there are risk management methods such as take-profits and stop-loss to control losses.
- Trade Forex, shares, and other instruments -CFD trading offer a wide range of trading instruments and assets that can benefit you and help you improve your trading portfolio. You can buy & sell at NAGA by getting access to shares, and indices such as DAX and FTSE 100 and check NAGA ratings too. There are major, minor, and exotic forex pairs, Gold, silver, other commodities, and cryptocurrencies.
- Profit from markets going down - Trading CFDs enable you to trade the underlying asset without owning it. This can be highly advantageous for traders who want to go long or short. To open a short position, one must sell their contracts and while closing the position buy the same number of CFDs you sold. If you trade CFDs, you can learn a lot about the market as it can add confidence to your trading performances.It is a process to short a company with a CFD and earns a profit during the fall of the asset prices and this works the other way when the stock rises and you can face a loss.
- Similar to traditional trading -There are several other derivatives like spread betting, options, and futures and CFDs are not only the ones to trade financial markets. Therefore, if you are used to traditional investment and trading, you will find CFD trading more familiar compared to other derivatives. If you are buying and selling CFDs, you are mirroring the assets that they are representing. A single CFD represents one unit of the underlying asset and for deciding the size of the position you can decide the number of contracts to buy and to sell.
- No-risk trading -To experience risk-free trading, you can open and try it with a demo account. However, this is suggested for beginners and first-timers with little or no experience. With a demo account, one can trade a wide range of markets and get access to several tools and features of NAGA. It is very easy to switch to live trading where you just have to deposit funds after opening a live account, logging into the platform, and finding the first trade. If you are looking for risk-free trading within a safe environment with regulations, NAGA is the best CFD trading platform for both beginners and professionals.
Leverage in CFD Trading
Investors can get exposed to large positions without having to commit to the entire cost of the asset. With a contract of difference, you only pay a significant percentage and get a chance to utilize your capital further. CFD traders can incur huge losses if the trade goes in the other direction. Hence you must trade within your limit and make sure the leverage ratio is perfect.
Leverage in trading is a vital advantage that attracts thousands of traders worldwide to take chance on an asset and start trading long-term. One should understand leverage in CFDs and proceed with live trading.
Margin In CFD Trading
The margin represents a fraction of the total size of the fund that is required to maintain a position. There are two kinds of margins, a deposit margin, and a maintenance margin. A deposit margin is necessary while opening a position while a maintenance margin can help when you have incurred losses.
You can get notified by the broker about when the losses will show on your account. This is known as a margin call and it occurs when you do not have sufficient funds in your account and the chance of it may be that the position closes.
CFD Hedging
CFDs are used to hedge against losses. If you speculate that the company can suffer with a short-term dip due to an unsatisfactory earning report and there are chances you can incur losses by going short on your CFD trades. So, if you decide to hedge the risk, any drop in the company’s shares can be a gain in your short CFD investment.
How do CFDs work?
If you have understood what contracts-for-difference are, you must learn how they work and how you can make them work in your favour. CFD trading consists of deal sizes, profit/loss, durations, and spread.
- Deal sizes -A CFD is traded in lots or standardized contracts where the size of a contract depends on the underlying asset. For example, if Silver is traded in 5000 lots of troy ounces, the CFD value will be the same. However, the contract size for shares is represented by a single share within the company. This is also a way that it is similar to traditional trading methods.
- Spreads and Commission - The two prices in CFDs, the buy price and the selling price. You can open a short CFD at a sell or a bid price and for opening a long CFD, you require the buy or the offer price. The selling price of the CFD is always lower than the present market price and the buy price is higher. So, spread is the difference between two prices.A position is covered in the spread which is the cost to open a position where the buy and sell prices get adjusted to reflect and make the trade cost. The only exception are the share CFDs which do not get adjusted according to the spread. Check out NAGA rating because of the platform’s low spreads and commissions.
- Duration -There are no fixed expiry dates of CFDs but you have to place a trade in the opposite direction to close a position. The contract position with an equal amount is used to sell to close the position. You will also be charged an overnight fee for keeping a position open. It is different with a forward contract because those have expiry dates in the future with overnight charges may be included in the spread.
- Profit & loss -To calculate the profit & loss from a CFD trade, you should multiply the deal size or the total contacts in the position by each contract value. Then you can multiply the difference in points between the price of opening the contract and when you have closed it.Also, to calculate the full profit or loss of the trade, one must subtract the fees they paid such as overnight funding fees, guaranteed stop fees, and overnight charges.
Final word
CFD trading online can successfully generate potential profits when done with the right guidance and with enough market experience. Investors must possess knowledge & understanding of leverage and margin in CFD trading. Beginners can also trade online CFDs with a recognized forex broker that abides by regulations and compliances. There are potential rewards and risks on the other hand.
For more trading opportunities you require CFD trading strategies and applying appropriate trading education and guidance. Plus, you should beware of the broker's fee schedule and see whether they offer risk-controlling features such as negative balance protection.
At NAGA, we offer you a solid and safe trading environment with unique social trading opportunities like Autocopy to copy strategies and utilize ideas from experienced traders.
NAGA also provides excellent 24/5 customer support, several account types & demo accounts, mobile trading on iOS and Android, and a wide range of educational materials to devote your time. Trade with NAGA and experience CFD trading like never before.
Disclaimer :This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.
