The past couple of years have seen a rather drastic inclination towards online trading with more people feeling the necessity to have a passive income. This is with good reason especially as more and more people become more knowledgeable about the importance of having investments for future purposes. One of the many trading and investment instruments that have managed to garner the attention of numerous investors is the CFD. In this article, we are going to explore what the CFD trading is, how it works and its advantages.

What is CFD trading?

CFDs otherwise known as Contract for Difference are rapidly growing markets that allow retail traders to invest in an asset class without having to own the asset. They are often used to not only trade but also to predict financial markets price movements even in the midst of fluctuating prices.

For success in CFD Trading, one needs to be informed about the current state of the market. Which factors are contributing to the market shift? You can get such information by visiting online platforms such as CMC Markets which has always stayed ahead in informing their followers about such useful events.

How CFDs work?

You will often find that CFDs is a currency which differ from other forms of trading in the sense that they not only allow traders to profit from falling markets but also markets that are rising as well. Therefore, if traders have a gut feeling that the price of the said item will rise, they go ahead and buy the asset and profit from increases in price. Inversely, if traders believe that the price of the item will fall, they sell the asset and if the markets move in the direction of their gut feeling, then they profit from the fall in prices. However, if markets do not behave as anticipated, then the traders stand a chance of suffering loses.

Markets that you can trade CFDs on

CFDs can be offered on a number of global markets as well as multiple asset classes that can be traded on:

• Indices
• Forex
• Commodities
• ETFs
• Shares

Advantages of CFDs:

• CFDs give traders an opportunity to get a full market exposure for only a small amount of the assets price.
• Traders get access to tons of global markets.
• Traders are able to access a variety of commodities including but not limited to gold, silver, and oil.
• Traders can trade in volatile markets.

Disadvantages of CFDs

• Unlike other forms of trading, CFDs carry a lot of risk with them to the trader’s capital.
• The value of investments keeps on fluctuating and that means traders have a chance to lose much more than what they had initially paid.
• It might not be a suitable form of trading for certain investors and hence necessitates the traders to consult a financial investor before they take it up.

Trading costs for CFDs

Before trading the CFDs, there are a number of costs that traders need to put into considerations including spread, market data fees, holding costs and commission.

Spread costs for CFDs

The spread is a term that is often used in the CFD trading platform to refer to the difference between the going buying price and the going selling price. For instance, the buying prices for the UK market may be 6,458.7 whereas the selling price may fall at 6457.7. The spread between the two is 1.0 which is calculated by subtracting the buying price from the selling price.

Share trading commissions for CFD

Different countries have different share commission charges for CFD trading shares.

Shares that are not from the US or Canada often have their commission charges in percentage values. However, for Canadian and US shares, the commission is normally charged at 1 cent per share.

While trading CFDs seems all glamorous and fun, it carries a considerate amount of risk with it and may therefore not augur well with traders who are risk averse. It is therefore imperative to put into considerations the kind of objectives you have when it comes to investing, financial resources, how experienced you are and how much risk you are willing to take when it comes to trading in CFDs.