Contract for difference trading (CFD) is a very popular method of trading securities, indexes, etc. The trader is benefiting from the difference between the buy and sell price. The methods in initiating a trade is rather straightforward, as shown here. You must notice that CFD Trading is not permitted in many countries, such as the United States because of federal securities law.
Step 1: Understanding what is CFD Trading-- Contract for difference trading occurs when an individual creates a buy or sell order on an item, but does not purchase the item for full price, rather the individual purchases it on margin (which involves a high degree of leverage). As compared to physically holding a equity, CFD's allow you to buy more for less and increase your earnings at a higher rate (if essentially amplifies your earnings).
Step 2: Know the basics of Trading-- Before trading CFD's, you must understand the fundamentals of trading any type of equity. This involves understanding the concept of leverage, buy/sell orders, and the various other types of vernacular associated with trading in your country.
Step 3: Opening an account with a CFD provider-- Looking for the right CFD provider can be a daunting task if an individual does not know what to look for. The most important qualities of a CFD provider is whether the provider is reputable, has low commission rates, and offers the particular margin requirements to meet your needs.
Step 4: Calculating your margin requirements-- Initiating your first trade is pretty simple once you have calculated your margin requirements. First, determine the quantity of an equity you wish to buy or sell. The following is an example of a CFD trading order:
Buy 100 AAPL stock at $190.00 at 5% margin (20:1)=
Physical order= $19,000
Margin Requirement= $950
Now you have calculated your margin requirement of $950, this means you must keep at least that amount in your account, or the CFD provider will call your margin and your positions will automatically be canceled.
If you wish to sell when the price increases by $2, the calculations will continue as follows.
Sell 100 AAPL stock at $192.00
There would be a gain of $2,000 in your CFD account as compared to $200 if you processed a physical order.
Step 5: Understanding the effects of CFD trading-- CFD trading can be very beneficial to your account by amplifying your earnings, but it can also be rather detrimental by amplifying your losses. Thus, you must understand it is very risky.