Everything you need to know about CFD trading

If you are a newbie in the trading markets, you may hang a bit when coming across the term “CFD trading”. Do not have any worries whatsoever, since this particular piece of article will get you through this.

CFD trading meaning

CFD trading, Contracts for Differences, is a popular term in South Africa that refers to the method that offers traders and investors the opportunity to make profits by speculating the price movement without owning the underlying asset. It generally involves computing the price difference of an asset, from its entry and exit in the markets, without considering the value of the underlying asset.

CFD trading is achieved through a contract between a broker and a client and does not employ other market instruments, including stocks, futures exchange, and forex. Trading CFDs is a typical practice these days, due to its vast benefits to traders and investors.

How does CFD trading work?

CFD trading is a simple form of trading as compared to other derivatives trading. Since it primarily involves a contract between a client and a broker, both parties usually make predictions of the asset’s price during the opening and closing of the markets.

When initiating CFD trading, you are to pick the CFD units you prefer to use. Your profit is, therefore, computed depending on the number of units gained during the market period.

Let us put it simply this way. When the market behavior is in your favor, you gain more CFD points, which correspond with the increase in your profits. Conversely, when the asset’s price difference does not align with your predictions, you make losses.

For example, if you speculate the price of item A will rise, you could start a trade of 10 CFD contracts at the cost of 1000. If the market performs in your favor and rises 20 points to 1020, you will make a significant amount of $200 after the trade exit period. The profit arises from the computation of the number of contracts and the price difference of item A. However, if the market behaves otherwise you will mark a loss of $200.

How to identify the best trading site

Due to the popularity of CFD trading in South Africa, there exist different platforms and sites for trading CFDs. Therefore, identifying the best website for your trading might be difficult for you, with no prior guidance and knowledge. Below are several guidelines you can employ when choosing a trading site for your CFDs.

  • Complexity differences. Different sites have multiple structures and functionalities. It is advisable to consider the interface and the experience you are having when using the trading site. As a trader, it is safer to pick a website with a simple interface that will require less effort when navigating through the trading site. A trading site with a poor user interface results in making mistakes while trading, and therefore, evaluates significant avoidable losses.
  • The features possessed by the trading site. When you consider the site’s simplicity, a useful trading system has a suite of reliable customer review features, fundamental and technical analysis tools. The tools assist, guide, and make trading more straightforward for the trader. They help in generating valid results after the end of the trading period.

CFD trading account

Creating a trading account for your CFD trading is a walk-in-the-park process. As a trader, you are required to open an account with your chosen broker or platform. Some accounts, like IG account, require fees during the initiation process. Once the payments are funded in the account, a trader gets access to the account, and the process begins.

Several trading accounts provide their users with demo accounts, an added advantage for the inexperienced traders. Demo accounts assist new traders in practicing their skills and knowledge before entering into the real markets. They help you familiarize yourself with the trading account and grant traders a chance to craft efficient strategies for the trading process.

CFD trading brokers in South Africa

There exist multiple CFD trading brokers in South Africa. Brokers in the said country require mandatory regulation by the Financial Services Board. The majority of these brokers have poor customer support and a limited platform choice. However, at CAPEX.com South Africa, traders opting for brokerage option enjoy no withdrawal and trading fees, only paying the spread of their respective trades.

CFD trading platform

CFD traders can access different platforms, including web-based platforms, mobile platforms, and other advanced trading platforms. Some of the preferred platforms are MetaTrader 4 (MT4) and MetaTrader 5(MT5).

The platforms have the best picks due to their simplicity and additional features, such as tools for formulating effective strategies, informing trade alerts, backtesting, and automated trading features. Traders also get the opportunity to make significant trading decisions and avoid losses in the market.

Pros and Cons of CFD Trading

CFD trading comes along with both its benefits and risks. Below are some of the pros and cons of trading in CFDs.

Pros of CFD Trading

  • Leverage investing. Trading with leverage makes it possible to get higher returns with little investment amount, but also lose your capital quickly. CFD traders enjoy massive advantage from their brokers with minimum investment. For example, with the leverage of 50:1, a CFD trader can initiate a $5,000 position with only a deposit amount of $100.
  • CFD traders gain profits from both rising and falling markets. With Contracts for Differences, an investor has unlimited opportunities. You can make profit returns even when the price of the underlying asset falls, unlike other types of trading, which are only beneficial in rising markets. Of course, if the market turns against you, you can lose your capital, there are risks involved, as in any type of investment.
  • CFD trading is a cost-friendly method of investment. Investors do not have to pay for the stamp duty since there is no ownership transfer of assets.

Cons of CFD Trading

Below are some of the drawbacks of investing in CFDs.

  • Although CFD investors have access to exceeding leverage, the level of risks involved can get higher. If a trader lacks competent skills and knowledge, the little amount of investment used may be risked even after a slight price difference in the market.
  • CFD trading is less suited for long-term investment. Traders have to pay for higher financing costs, and it may become more costly for traders investing for periods longer a year.

Final thoughts

CFD trading is a popular method of investment in South Africa. There are numerous brokers and platforms with different offers and functionalities. It is wiser to familiarize yourself with how the trading works and have prior knowledge before initiating the process into the real financial market.

Whether you want to trade in CFDs or what to know how it works, you can check out an online trading platform such as CAPEX.com for professional guidance and trading services.

Article Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the risk of losing your money.

Categories: Stock Market

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September 2, 2020 Everything you need to know about CFD trading