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How to Trade CFDs
You might have heard the term “CFDs” before, but what does it mean exactly?
Well, a CFD instrument is technically the “agreement” between the broker and the trader to pay the difference between the open and the close price of the trade.
This basically allows the trader to open both a buy and a sell trades as the CFD is based on the speculation of whether the trader believes the price of the instrument will go up or down.
Let’s look at an example, shall we?
So, let’s say that you buy one contract of Tesla at $500 and close the trade when it reaches $550. Well, you just made a profit of $50! Congrats!
But, if you believe that the price of Tesla will fall, you can open a sell contract, and if it actually goes down, you will again have made a profit. If however, the price of Tesla goes in the opposite direction, this means that you are at a loss.
The good thing about trading CFDs is that you can take advantage of either direction of an asset’s price. The major benefit of trading CFDs however is Margin. Here’s what we mean by that!
For the sake of our example, let’s hypothetically assume you buy 10 shares of Tesla at $500 per share, for a total of $5000. Margin, in this case, allows you to take advantage of trading at a fraction of the price. So, if the requirement is 20%, you only need to have $1000 in your account instead of the entire $5000!
Now you gotta know that CFDs come with a couple of fees, such as: Swaps - the fee for keeping the contracts open overnight Commissions - depending on the broker.
Now you know how to trade CFDs!
Hooray!
