A lot of you reading this have probably heard of the term CFD being thrown around by very successful people. Some may probably be potential investors in the financial trading market and have stumbled upon CFD Trading. But what is CFD? It stands for Contract of Difference and is mainly an over-the-counter agreement through a contract between two parties where one pays the other based on a determined amount from the differences between an opening and closing position in the contract.
The underlying assets are the ones that dictate the prices at which a certain CFD contract is based for trading. These assets are dependent on what the traders choose from, whether it’s equity, an index, commodity, currency or bond.
For traders, CFD enables them to gain exposure to assets without physically owning any of the assets. They are able to make short or long positions depending on their projected outcome or goals. This is a very accessible form of trading due to a small amount of capital required thanks to leverages.
You have probably heard of the term “Going Long” but do not really know what it actually pertains to in CFD Trading. This means that you are buying a position in CFD to earn gains from the share price’s increase. When a long position is placed by a trader, they would believe that the market shall go into an ascending direction and this is a very common occurrence in CFD. When a trader goes long, simply put, he or she is looking into the value of the asset they are interested in to increase.
When trading CFD however, you will need to consider a few expenses along the way. When trading, some CFD Brokers will start charging the fund you will need for financing that eventually leads to an expected interest expense that is associated with the long position you have decided to make. Most of these brokers would tie their rate of interest to the benchmark market rates. Some brokers might even charge a commission or even lending fees that you will need to scrutinize as you go along with CFDs. These are usually present in the additional fees of the broker. Learn to read through agreements with the brokers before signing up so you may have a clear understanding of potential earnings for you to gain (or even effects when in the middle of a loss)
Another term you might have heard from others is “Going short” which means that a trader is opening a short or sell position during CFD trading so they might profit from the possible price decline they are projecting. One of the few things that a lot of people enjoy in CFD is you are able to profit from decline of prices as you anticipate the prices to fall. Unlike other forms of trading, you are able to gain from the decline of underlying assets unlike in other forms of exchanges where you are only able to focus on the rise.
Are there dividends to be earned even if you are not really an owner of any physical asset? Long equity CFDs are to earn dividend income on certain dates. The trader earns dividend income and quite the opposite with short positions, as your CFD position is at a short position, the fund will incur expenses for the dividends.