Those who are into forex trading would certainly be aware of CFD which stands for Contract For Difference. However, it is a relatively new financial derivative which has hit the market and therefore the awareness levels are not as high as one would like it to be.
However, there is no doubt that it is a great product and offers an honest chance for small investors to make big money. Those who have gone through articles and blogs and visited reputed websites like CMC markets would most certainly have understood how CFDs work and why they are becoming so much sought after.
Experience Is The Best Teacher
Though there could be many articles about the benefits and advantages associated with CFDs, the best way forward would be to experience it oneself. Only when you experience it would you be able to understand that you would be in a position to trade on margins. It also will teach you to short sell and also go long depending on the direction in which the currencies are trading. You will realize that even with small money it might be possible for you to make handsome profits.
It Will Help You To Understand More About Leverage And Margin
Though the terms margin and leverage are we have to understand that CFDs perhaps are the most leveraged product. In other words even with small margin money it is quite possible for you to enter into the market and still make money. You can open a position even if you deposit around 5% of the actual forex value which you are aiming for a specific period of time. This is what trading on margin is all about. The biggest advantage with margin trading is that it can help you to maximize your returns. However, at the same time when there is a downturn or if the forex moves southward your losses could also be hefty. Hence this is something which you always must keep in mind.
CFD Experience Will Teach You About Costs Involved
Nothing good in life comes for free and the same also apply to CFD. When you get into CFD you must learn to pay for the spread. This is nothing but the difference between the buy and sell price. You get into the CFD market by using a buy price. On the other hand when you exit you have to use the sell price. Hence if you have a difference which is small, you are at an advantage because the lesser the price needs to move to your side. Hence you must know how to master what is referred to as profitable spreads.
When one reaches the end of the trading day if there are any positions which are left open, then you would be subjected to pay what is referred to as holding cost. This holding can either be in the positive or negative territory. It would depend on the direction in which is position is at the end of trading on a particular day. The holding rate applicable would also play a role in deciding on the holding cost. Hence while calculating profitability you must always take this into account. Apart from the above you also must be ready to pay market data fees. Paying this fee will help you to get highly useful and factual information about market data and information. Finally you also must have to pay commission. However, this is applicable only for share. This commission will become payable whenever you are trading shares using the CFD derivative route. The commission could range from 0.10% to 0.25% depending on the market in which you are trading.
You Will Know The Type Of Instruments You Can Trade
The proof of the pudding at the end of the day lies in eating. Hence, only when you get into the actual trading would you know what CFD is all about. You will also be in a position to understand that you have a wide variety of instruments to choose from. In fact you can easily trade around 10000 CFD instruments. It is also possible to trade in forex pairs such as AUD/USD, EUR/USD just to name a few.
Hence it would always be advisable to get started with low margins and then learn the tricks of the trade as you move along.