Basics of CFD trading

A CFD or contract for difference is a tradable derivative product. As the name suggests, CFD trading is based on speculation on the price of the asset it refers to. The settlement of profit or loss is done on the basis of price difference,

If you buy a CFD for AUD 25.50 and sell it after a few days at AUD 27.50, the counterparty to the contract, usually a CFD provider, pays you the difference, which is AUD 2. CFD trading is done in lots and depending on the price of the underlying asset, a lot may comprise of any number of units. In this example, if the CFD represents 100 units, your overall profit is AUD 200.

CFD trading employs a high level of leverage. This allows traders to initiate high value trades with a small capital. This is commonly known as margin trading. In CFD trading margins can be as low as 5%. So instead of having to put up 2550 dollars in the above trade, you employ only 127.50 but still get the full benefit of 100 units should the price move favourable to your position. A profit of 127 dollars on an outlay on 200 dollars is something that you cannot expect while trading directly in the underlying asset.

Besides the high level of leverage, CFD trading allows access to global markets from one platform as most providers offer CFDs for assets in international markets as well. There are no transaction fees. While buying, a trader pays the ask price, which is always more than the bid price, the price at which a trader can sell.

CFD trading has many advantages. However, traders still have to learn how to manage the risk associated with trading in markets.