Contract for Difference or CFD is a type of agreement between a broker and a trader that relates to the changing value of an asset over time. It is a popular option for beginner traders for several reasons although there is still learning involved. Here is an introduction to CFD trading for beginners.
CFD trading basics
With CFD trading, the trader never actually owns the share, index or commodity. Instead, they use their judgement and strategy to decide if the value of the asset will go up, known as going long, or go down, known as going short. Traders only need to put down a small deposit for any trade, known as trading on margin. So, if you were buying a share with a price of 100 pence, you would usually only require a deposit of 5% to start off with – just 5 pence per share.
If the trader is right about their predicted outcome, the seller pays the difference between the initial buy price and the new value of that asset. But if the trader gets it wrong, they have the pay the difference to the seller. Here’s a simple example:
Buy 1000 CFDs x 100p – £1000 Sell 1000 CFDs x 120p £1200 = £200 profit
Buy 1000 FDs x 100p – £1000 Sell 1000 CFDs x 90p – £900 = £100 loss
The difference between the selling price or bid and the buying price, also called the offer or ask price is known as the spread. The selling or bid price is the lower of the two figures, and this is what the trader can sell at. The buying or offer price is the higher figure and is what the trader can buy at. There are also different types of spreads to learn about.
What can you trade?
CFD trading is available in a wide range of trades including:
Individual equities or shares
Limited companies such as Apple or Facebook are floated on the stock market, and this means anyone can invest in them. Their share price changes due to different factors within the company and the wider world
These are collections of companies in a geographic area – the FTSE 100, the UK100, the Dow Jones are a few examples
These are things such as crude oil, gold and agricultural products that can change in price due to various factors
Currencies are traded in pairs, and their price against each other can fluctuate creating the opportunity for CFD trading
Tips and tricks
Every trader will have their own tips and tricks that they have learned over their time trading.
You, too, will build up your own bank of such knowledge but here are a few to start with:
- Start small – don’t jump into trading with large amounts at the beginning because mistakes are inevitable
- Don’t trade on impulse – use the strategy and learning you have done to make informed decisions
- Decide on when to enter and exit a trade – and stick to it
- Set stop losses – don’t be tempted to move them
Learning to trade
One of the best things to do when you start trading is to learn as much as possible and one of the best ways to do this is with a demo account. You can easily open a demo account where you can start practising trades and build up a strategy to see what works. Demo accounts work virtually the same as a live account, but you use virtual money rather than real money. So, if you make a loss on a demo account, you have gained information but lost no money.
You can create a GCC Investing Demo Account today and start learning all you need to make successful profitable trades. The site also includes a range of educational materials and when you are ready, you can start with your real live account.