So what is CFD trading? Well the term itself stands for Contract for Difference. You’re probably thinking great, what the hell does that mean. And basically it means this. The difference of the contract price from the time you bought it to the time you sold it. And of course vice versa if you went short (meaning you sold first and bought later).
A few things to know.
- You can trade CFD on margin. Which basically means you don’t have to provide the entire cost of the instrument just a small portion of it. Very similar to futures and options. Just like in options, with CFD’s, you never own the underlying instrument, you just have the right to purchase it at the price of entry or exit.
- CFD you can go long or short. Again pretty much like stocks, futures, options, Forex.
- Commissions on CFD’s are just like a futures contract. You get charged a round turn fee. Once for entering the trade, and once for exiting the trade.
- Stop losses can be placed on CFD’s. Just like in any other market, the stop loss will reduce your risk at a set price. But, just like in any other market, you could get slipped and lose a little bit more than your intended price (stop loss) in a fast-moving market. However, there is something called a guaranteed stop loss. Usually this is done by the CFD broker. The CFD broker will charge the trader a premium in order to guarantee the stop loss. In the event that the market jumps your stop loss and you lose more than the intended amount, the CFD broker is liable for the excess loss.
In short… Don’t Be Scared. No but seriously, there’s nothing to fear. Trading online CFD’s are just like anything else. It’s just a different vehicle with the same moving parts.
The Trader Institute