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What is CFD Trading?

Have you ever wondered what CFD trading is? Ever wanted to get rich by trading CFD? Or are you just curious on what CFD trading is all about? Well, look no further as this article is going to answer your burning questions on what CFD trading is. CFD is largely defined as the buying and selling of CFDs’ (contract for difference). CFDs are a derivative product because they allow you to predict financial markets such as shares, forex, indices, and commodities without owning the actual underlying assets. When you trade with a CFD, you agree to exchange the difference in the price of an asset from the point at which the contract is opened to when it is closed. One of the primary benefits of CFD trading is that you can predict on price movements in any direction, with the profit or loss depending on the extent to which your prediction is correct or incorrect. For more articles like this one, click here.

why trade cfds 810x481 1 - What is CFD Trading?

CFD trading allows you to predict price movements in either direction. So while you can copy a traditional trade that profits as a market rises in price, you can also open a CFD position that will profit the underlying market reductions in price. This is known as selling or ‘going short’ as opposed to buying and ‘going long’. For example, if you think an Apple share is going to reduce in price, you can sell a share CFD on the company. You’ll still exchange the price difference between when your position is opened and when it is closed, but you will earn a profit if the shares reduce in price and a loss if they rise in price.

With both short and long trades, losses and profits will be realized once the position is closed. CFD trading is leveraged, which means you can gain exposure to a large position without having to give the full cost and outset. For example, you wanted to open a position equal to 500 apples shares. With a normal trade, that would mean paying the entire cost of the shares upfront. On the other hand, with a contract for difference, you would only have to pay for 5% off the shares. While leverages allow you to spread your capital further, it is imperative to keep in mind that your profit or your loss will still be determined on the entire size of your position. In the example given, that would mean the difference between the prices of the 500 Apple shares from when you opened the trade and when you closed it. That means that profits and losses can be largely magnified compared to your outlay and that losses can exceed deposits. For this reason, it is imperative to pay attention to the leverage ratio and make sure that you are trading within your means.
In conclusion, trading with CFDs is an entirely different process compared to trading foreign exchange currencies using forex. Trading with CFDs can make you rich but you will have to be careful as CFD trading is much more difficult than doing foreign exchange. You can end up earning big profits, or you could end up losing a lot of money.

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