Is CFD trading good for beginners?

Over the past few months, CFD trading has grown in popularity as more traders begin to take it seriously as an investing concept. As a result of the increasing number of people who turned to CFD trading to boost their financial status, many brokers now include it as part of their offerings to their clients.

As with many trading approaches, it’s crucial to conduct thorough research and make sure that CFDs are suitable for you before investing money in the CFD market.

As someone new to CFD trading, there is a lot to consider due to the high leverage choices and variety of financial markets. The fundamentals of CFD trading for beginners will be covered in this article, along with key strategies and suggestions for the most effective platforms.

About CFDs

The term “CFD” refers to a contract involving you and the broker that is based on the variation in the value of an asset, such as a stock, currency, or commodity, over some time.

When purchasing a CFD, you decide whether you believe the price will increase or decrease from its current level. This is also called a long contract and short contract respectively. 

When you complete the contract, the broker is going to pay you the price difference if the market moves in the way you like. If not, you will be required to pay the broker the difference.

Leverage, often known as margin, is a trading strategy that allows you to borrow money from the broker to make CFD trades. It may greatly increase revenues but losses as well.

Margin in CFD trading

Due to easy access to leverage, CFD trading is popular among novices. When you trade on margin, the broker lends you the remaining amount after you’ve paid part of the asset’s entire value. Consequently, you can get an important share while just paying for a portion of it upfront. The broker determines the percentage you must pay; it often varies between 5%-20% of the whole price, depending on the asset you are trading.

Consider that your CFD broker provides CFDs for equities with a 10% margin and that an Apple share costs $100. As a result, you will be able to purchase a CFD for a single share for $10 and borrow the remaining $90 from your forex broker.

If the share price increases to $110 and you decide to close your position, you can return the $90 you borrowed to the broker, receive your initial $10 back, and earn an additional $10, which is the net amount of any costs. As a result, you double the amount you initially invested.

The drawback is that, even if you lose money, you will always have to pay back the broker what you borrowed. You will have to pay the broker $90 when you cancel your CFD if the share price has fallen to $80, which is a further $10 in addition to the initial investment you made.

Basics of CFD trading for beginners

Spreads & Commissions

A CFD market will always have two prices published. The sell price is shown first, followed by the buy price. The spread refers to the variation between the two.

Most of the time, the spread includes all of the costs associated with trading a CFD, eliminating the need for commission. On other marketplaces, though, a commission will be used in its place. The spread on these markets is far lower.

When trading long positions, you start at the buy price and end at the sell price. On the other hand, with CFDs, you may open at the sell price and close at the buy price. We refer to this as shorting.

Shorting

As already discussed, a CFD is just a contract with which your provider agrees to pay you the amount of money that a market has changed in your favour.

Since you don’t buy the market, you may decide before you open your position whether you want to benefit from upward moves, also referred to as going long, or negative movements, also known as shorting.

By purchasing CFDs, you go long. If the market has increased when you close your trade, this will result in a profit. Selling CFDs allows you to go short. If the market falls when you close the trade, you will make a profit. Let’s assume that you think that the downturn of the global economy would cause the price of oil to decline. You might generate revenue with contracts for the difference by selling Brent oil CFDs during a bear market. You can close your trade and keep the difference in price if the price of Brent crude declines. However, you would take a loss if the price of oil increased instead.

Advantages of CFD trading for beginners

Access to markets

When you’re just getting started, CFDs can help you gain access to a wider range of asset classes, investments, and financial markets. Investing in various financial markets and assets can help you build a more diversified portfolio.

Cheaper costs & pricing

CFDs provide you with simpler access to a variety of assets and the ability to trade pricey investments that you wouldn’t normally be able to. For instance, you might not be able to afford a company with just one share price of £1,000. However, you could potentially be able to get your hands on that same asset for a small portion of the true cost of buying it by forming a CFD agreement with a lender. As a result, you will normally spend less on fees, especially if they are determined as a proportion of your investment.

Easy to implement

CFD transactions are easy to carry out for investors because a large portion of the weight of the purchase lies on the broker.

CFD trading tips for new traders

Do what you know best

Although there are several CFD marketplaces available, you are not required to immediately start trading in exotic assets. Picking a few markets that you are already familiar with is typically a better initial strategy. You may begin to diversify a little more as your confidence grows.

Don’t start big

When trading, position sizing may be quite helpful. The basic concept is to only put a small portion of your overall capital at risk with each trade, like 1% or 2% for example. Keeping your overall expenses low allows you to make mistakes without suffering too much loss. If your risk per transaction is only 2%, you might be able to make a few wrong trades in a row before you lose all of your capital.

Use stop-loss orders

Using stop-loss orders at all times lets you manage risk on any particular transaction by instantly terminating a position if it suffers a certain degree of loss. They allow you to stop continually monitoring each open trade and leave out emotions. No matter how experienced they are, successful traders will never initiate a position without a stop being attached. Standard stops, however, are vulnerable to slippage, so they cannot completely limit your risk.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.