CFD trading on indices and commodities

Understanding CFDs

A Contract For Difference, commonly known as a CFD, is the term used to refer to a contract that is signed between a buyer and seller of an asset. The agreement stipulates that the buyer is required to pay the seller the difference between the current value of the asset and its value at a predetermined date, i.e. the contract time or expiry date. The appeal of CFDs for some is that it allows the trader to avoid gaining ownership of the asset, and ultimately any risk associated with it for the duration of the agreement, and yet have the potential to profit off its future value. The CFD is only mindful of the price change between entry and exit date. Despite that, there are certain costs that are associated with such an agreement, such as commission in some cases and finance costs that may be applicable for those that are looking to keep a long-term position. Positions that are maintained overnight are generally considered an investment and usually have interest charged on each day that the position is held. A certain fee may also apply upon entry and exit date.

CFD trading

To get started with trading CFDs on indices markets, the first step to take is finding an index that you are comfortable with and confident in. Some of the major ones worth considering are the FTSE 100, S&P 500 and Nasdaq 100. Thereafter, determine whether the market is bullish or bearish and then position yourself accordingly before commencing with your trading activity.

When it comes to CFD trading on commodities, there are several features that make it appealing to traders. The commodity market is considered one of the oldest financial markets, therefore making it somewhat trusted and credible amongst people. Commodities are often traded by those who are taking a more speculative approach to the markets, such as investment banks, fund managers and other financial institutions. In summary, to start trading commodity CFDs, you need to first select your market, the direction of your trade, as well as the volume of trade. Thereafter, continue using risk management tools and monitoring your position throughout your trading activity. Trading CFDs has advantages and disadvantage, some of which have been listed below.

Pros

  • CFDs give you a certain level of control over potential losses as there is the stop loss option. Essentially, this allows you to automatically close your position to avoid further losses.
  • Another major advantage of CFDs is that they allow for speculative trading, which means that you have the option to open a short position and get positive results when the price drops. With that in mind, some may even say that CFDs are great for those looking to capitalise on and take advantage of seemingly bad news in the market.

Cons

  • Due to the fact that financing fees apply, CFDs are not advised for long-term trade and industry insiders suggest them for a time frame of no longer than a year.
  • Requires you to be an active trader and dedicate a lot of time to monitoring your CFD trades.
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