CFD Trading and its implications for financial markets

CFD (Contracts for Difference Trading) is an operation consisting of trading on the financial markets without having to buy or sell the underlying assets. Do you want to get started in CFD Trading? How does the CFD work and what interest does it represent for investors in the financial markets?

What exactly is CFD Trading?

CFD Trading is the sale and purchase of contracts for difference. Its primary objective is to allow negotiations on the various markets that interest the trader without the latter owning the underlying assets. Concretely, this means that the investor can speculate on currencies, Forex, raw materials, shares without having any. The operation of the CFD is simple: the trader agrees to speculate on the price of the asset at the time of the opening and until the closing. The advantage of the CFD is therefore to be able to speculate on the rise or fall of the asset / To be able to use the CFD you must still have a good knowledge of the market because the gains depend entirely on the accuracy of the estimates on the lines of trades.

What concrete uses of the CFD?

Thanks to the CFD it is possible to carry out negotiations in short or long position. It is possible when the market rises to follow a standard order which generates profits for the trader. On the contrary, when the market is falling, it is possible to open a position to make profits. In this case we speak of a short position on the purchase, while the long position concerns the sale of the assets. Profits and losses are only realized when the markets close, so it is important to remain vigilant throughout the CFD.

The CFD also makes it possible to use the leverage effect which has the advantage of not mobilizing all of the assets from the opening. It is not as in the case of a simple operation to pay the entire price of the action, the currency at the opening but to mobilize only 5% for example of the total price of the action, of the asset. If the leverage effect is interesting since it makes it possible to diversify the positions, it should be kept in mind that the gains and losses on the leverage effect are calculated on the total sum and not only on the 5% spent. Thus, the risk of loss is enormous but when there is profit it represents a significant gain. Only good traders, those who accept the risks involved use leverage, this leveraged CFD trading is also called margin trading.

How to do CFD Trading with confidence?

Most trading platforms offer CFDs, but one of the safest remains the CFD trading platform available on Avatrade. To open a CFD Trading, all you have to do is create an online account. CFDs are traded via the establishment of standard contracts whose size depends on the underlying asset, which generally follows the health of the financial market. If you want to speculate on stocks for example, if you want 200 Microsoft shares, you will need to open 200 Microsoft CFD contracts. The contracts do not have an expiry date, to close them you just have to open an opposite position of the same value to the initial position: if you have a position to buy 200 copper contracts you must close with the sale of the 200 contracts on the copper.

To calculate the gains and losses of a CFD, simply multiply the number of contracts by the value of the contract and then multiply the figure obtained by the difference in value between the price at the opening and closing of the contract.

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