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CFD Trading Explained & Made Easy

CFDs are products called derivatives that allow trading on the market movements of live markets without actually taking ownership of the underlying securities on which the contract is based. “CFD” means contracts for difference.

The future movement of market prices can be speculated upon whether the underlying markets are rising or falling. An investor can sell short, allowing a profit from falling prices, or buy long, to hopefully profit from a rising market.

There are over 10,000 markets in which trading can take place, so there is plenty of exposure to markets that may not have been accessed previously.

CFD’s can be used to hedge against loss in any portfolio, by selling short, for example. If you have taken a long position in a security, and you feel that it is going to lose value, you can take a short position in a CFD and if the security loses value, your short position with the CFD will offset some or all of the loss.

Most CFD trading platforms offer 24/7 trading opportunities, allowing customers to trade at any hour of the day, whenever they feel like it. If you are travelling, or at home, you can have access to your account in order to make a trade.

The CFDs are traded on leverage, which means that only a fraction of the total price is required when trading CFD. As an example you could trade a certain number of shares of a CFD, with a margin deposit of only 5%.

The leverage can be used to maximize the profits and your return on your investment because you are only putting down a fraction of the required price. By the same token, you stand the chance of losing far more than the money that you are putting up for the trade. The profit or the loss is magnified way over the amount of your actual investment in the trade.

CFDs were originally used by hedge funds because of the relatively small amount of capital required to do a deal. Plus the fact that no physical shares were required to change hands, made the transactions easy to work, and work in great quantities. The derivative market was made available to the retail market in the late 1990′s.

Trading in CFDs is a fairly complex and sophisticated operation, and the propensity to gain or lose great sums of money very quickly is not a pastime for the faint-hearted. Only those with the financial capability and the knowledge and experience in CFD’s should engage in this type of transaction.

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