CFD trading involves a trader entering into a contract with his broker. Through this contract, it is possible to exchange the difference in the price of the asset he is trading in, from the time he takes a position to the time he closes it. It can be a very profitable move if you enter the right position at the right time. It can bring great losses too, if you make a decision very fast, without taking time to think of the most likely movement of the share price and factors that can influence this movement. This is a guide to 3 ways that CFD trading works to help you get started:
1. The Spread and the Commission
Prices are usually quoted in two prices, which are the buying and the selling price. The buying price is also the bid price and it is the price at which the trader can open a short CFD. The selling price, on the other hand, is the offer price and it is the price at which the trader can open a long CFD. The bid price will always be lower than the current market price, the same way the offer price will be higher than the market price. The difference between these two prices is the spread. What happens is that the cost to open a CFD is usually covered by the spread. The buy and sell prices will be adjusted in such a manner that they will reflect the cost of making the trade.
2. The Size and Expiration of CFD deals
One can only trade in CFDs in contracts that are usually standardized. The size of a trader’s contract will depend on the kind of asset they will be trading in and this is usually a reflection of how the asset is being traded on the financial markets. The contract size of share CFDs is, for instance, the representative of one share in the company that you are trading in. If you want to open a position that reflects buying say 400 shares of a certain company, you will be buying the same number of CFD contracts. This explains why CFD trading is more like market trading.
On matters to do with duration, the position one holds expires when they place a trade in the opposite position to the one they had opened. A trader is charged extra if they keep the position open after the end of the trading period.
3. CFD Profits and Losses
Profits and losses are calculated by multiplying the deal size of the position the trader is holding the value of each of the contract. This is then multiplied by the difference between the price of the asset when you opened the contract and the price when you closed it. The money the trader enjoys as profit is the amount you get once you remove all the charges and fees incurred during trading. The fees, in this case, can include any commissions you might be paying, guaranteed stop fees and any overnight funding charges that could have been accrued.
CFD is a very lucrative market that is attracting so many investors these days. It is a type of trade that can be done by anyone because what is needed is just a computer and access to the internet. You also need to be willing to learn new things in order to enjoy great returns on your investment. The trade is very simple since you only need to speculate the direction the price of your preferred asset will take. With these three concepts on how the trade works, you can now get started on the right footing.