By Tory Vance
If you are looking to trade a financial instrument but want to try something other than stocks, then you can consider trading contracts for differences (CFDs). These financial instruments are a contract that pays traders the difference between the settlement price between the open and closing trades. As CFDs are derivative instruments, their value is derived from their underlying asset. As such, there will be no delivery of physical goods.
Recently, CFDs have become quite popular and accessible, with many traders starting to pursue them seriously. There are a variety of brokers – both in-person and online – that offer CFDs as part of their services, such as Saxo. In fact, you can even open up a CFD account straight through your mobile phone!
Of course, if you are thinking about trading CFDs, then it is best you start doing your research before jumping in. In this article, we have listed a few main steps to keep in mind when beginning your CFD trading journey. So be sure to read on and find out more about this topic.
Learn how they work
If you have no idea where to start, then at least start with this step. Make sure that you do thorough research on the topic and understand exactly how CFDs work. This is because there are a number of differences when it comes to trading CFDs compared to other financial instruments. For instance, you will not be owning the underlying asset that you are trading. As such, understanding these nuances can help you to trade more strategically and effectively. Fortunately, there are plenty of free tutorials and videos online that can teach you how CFDs work. Most brokers also offer tutorials to assist any potential customers, so feel free to check out their guides or reach out to their online customer service.
Open and fund an account
In order to place trades, you will need to open a CFD trading account. This trading account is your base of operations, where you can research new opportunities that crop up, open and close positions, as well as monitor your trades. To make the onboarding process smooth, most CFD brokers make opening an account quite straightforward. It mainly consists of filling out an application form, providing your personal and financial information, verifying your identity, and then transferring funds to begin trading. If you are still on the fence about trading CFDs, most brokers offer demo accounts for you to try out first. These demo accounts work on a ‘try before you buy’ premise, where you can get a feel of the trading platform’s interface. Demo accounts also simulate market behaviours, so it is a great way for novice traders to practice their trading strategies without risking any capital.
Create a trading plan
Before you start jumping into trading immediately, most experts recommend you build up a solid trading plan. This trading plan will be the foundation for your trading activity. Some things to consider when creating a trading plan include your motivations, trading goals, time commitments or constraints, financial situation and available capital in addition to your risk tolerance levels. Other factors you can include may be any markets you are interested in trading in, as well as preferred strategies. Having a trading plan is immensely important, as it helps you make effective and rational decisions, even when you are under pressure. It also ensures you do not lose sight of your goals, and that you know exactly what you are doing at all times.
Choose a market and timeframe
One of the great things about trading CFDs is that there are plenty of markets to choose from. Some assets include indices, forex, shares, commodities, and ETFs, to name a few. For instance, you can gain exposure in the stock market by trading CFDs on shares, so you can speculate on the price without having to own the asset. If you want to try something new, you can even speculate and hedge on commodities. Commodities usually refer to raw assets such as crops, livestock, precious metals, and energy.
Depending on the broker, traders also have the option of trading CFDs via futures or spot markets. A spot market (or spot trading), is where assets are bought and sold at the current market price – basically ‘on the spot.’ This option is popular for short-term traders, as they can open and close potions quickly. The futures market is the complete opposite of this. This is where two parties agree on a predetermined price on a future date. This means traders have the option to make longer-term trades where they can speculate on the price of an asset sometime in the future.
