Are you looking for a simple way to get involved with investing but want to avoid complicated maths and the administrative hassle that sometimes comes with asset ownership? If so, CFDs (contracts for difference) could be a perfect fit for your investing style. That’s because these unique financial contracts don’t require you to buy anything or risk any more money than you wish.
CFDs are unique in the fact that traders need not take ownership of anything. That’s because a CFD is a contract, not an asset. When you buy a contract for difference on a trading platform, you are essentially predicting what direction the price of the underlying security will move, up or down. If your prediction is right, you earn a profit.
Conversely, if the market moves against you, that incurs a loss. To be specific, you are the investor, and the contract between the investor and the CFD provider includes all the particulars of the current price of the underlying asset, the start date of the contract, and the amount of money you invest in the contract.
To get started with CFD trading, learn about the basics of what they are and how to buy and sell them via a reputable brokerage platform. Next, choose the market you prefer, like stocks or forex. Then, make calculated moves by deciding whether to go long or short, selecting the size of your investments, setting appropriate stops for maximum safety, monitoring your positions, and knowing how to close a transaction when the time is right. Here are more details about how to get started and execute trades the right way.
Choosing which market or markets to participate in with CFDs is your initial decision. For instance, many people choose to operate in the forex or stock markets, but CFD enthusiasts also invest and trade in other types of securities, like cryptocurrency, bonds, and more. Keep in mind that contracts for difference are called derivatives because their worth is derived from the value of the real assets underlying the contracts.
Going Long or Short
For many investors, the main benefit of CFD trading is the ease with which they can go short or long. Unlike traditional stock, commodity, or bond transactions, there’s no need to meet specific qualifications to go short with CFDs. In fact, shorting, in this case, involves the simple act of selling, instead of buying, a contract for difference.
Position sizing refers to setting the optimum transaction amount for a given trade. When you purchase or sell a contract, for instance, it’s important to know precisely how much of your capital is at risk. If you use leverage, you’ll need to calculate how much money you stand to lose or gain, based on whether you predict the price movement correctly or incorrectly.
Setting Stops and Limits
What’s true for traditional stock traders is true for CFD buying and selling. That means you should set stop points every time you make a transaction. Additionally, the use of limit orders will automatically take you out of a position after you’ve earned a specified amount of profit. Stops take you out after a specified loss amount.
Prices on all markets move quickly, so it’s essential to monitor your positions regularly. One way to keep tabs on all your positions is by using a mobile app or checking in with your brokerage platform regularly. This guideline is especially important for investors who use leverage and stand to earn or lose significant amounts of money on their trading activity.
For day traders, it’s assumed that monitoring will take place in real-time for the entire length of the session. Swing and longer-term traders should monitor all their positions regularly.