Trading CFDs

A CFD (Contract for Difference) is an opportunity for the small investor to speculate in a rising and falling market. The investor chooses either a long (buyer) or a short (seller) position, depending on whether he or she believes prices will rise or thinks they will fall.

The contract will pay the difference between the buying price and the selling price. If the investor is correct, he or she will realise a profit. The amount of profit or loss is based on the rising or falling price of the underlying asset.

The main advantage of a CFD is that it requires a much smaller investment than a full price contract. A CFD is a leverage device, generally at the rate of 10:1. In other words, the investor enters the market for about 1/10 of the usual amount. For this relatively small amount, the trader can produce much larger profits than would be possible in an account that is not leveraged. This makes CFDs a popular trading option.

With opportunity comes risk and responsibility. The investor needs to take into account his level of experience and knowledge of the market before investing in a CFD. It is entirely possible to lose more than was initially invested, should the market move against the investor.

One technique for containing risk is to utilize a stop loss order to trigger selling the product when the price reaches a certain point. This is placed in the initial contract as a way to mitigate any adverse event. In order for the stop loss order to help, a new investor must be found to take over the contract. This is not always possible.

For the small investor willing and able to accept the risk, a CFD can provide the leverage needed to reap increased profits in a volatile market. If the market moves in his or her favour, the benefits can be very great