Understanding CFDs

Beginner • Course 1

In the world of investments, there are different types of investment products; it's not just stocks and properties. The difficulty for investors is selecting the right product for their portfolios or as part of their trading strategy. It is important for individuals to start understanding the products offered and determine if they are appropriate for them.

All traders have different goals, requirements and risk appetites. Therefore the product must tick all the boxes. CFDs have been popular since 2014, but investors must consider both the benefits and disadvantages.

What is a CFD?

So what is a CFD? A CFD (acronym for contract for differences) is an investment contract allowing you to speculate the price direction without owning the actual asset. The price of the contract will mimic the underlying asset. For example, if the price of the NASDAQ is $10,000, the price of NASDAQ CFDs will be the same. If the price increases to $10,100, the CFD again will simultaneously do the same. However, this doesn't help much, so let's dive deeper into understanding CFDs.

Why Trade CFD?

CFD popularity has significantly increased as investors look for the following features which are offered by CFDs:

Leverage - leverage is when the broker allows you to increase your purchasing power by trading on a margin. This is known to have benefits and disadvantages, which we will look at as part of the course.
Shorting - Shorting refers to speculating the price of an asset will decline. For example, if the price of a stock is trading at $100, a trader can speculate the price will decline. If the price declines to $95, the trader earns $5 profit.
Liquidity - the ability to easily and quickly close trades to exit the market.

Learn and test your knowledge using our interactive trading course.

Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

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NAGA is a trademark of The NAGA Group AG, a German based FinTech company publicly listed on the Frankfurt Stock Exchange | WKN: A161NR | ISIN: DE000A161NR7.

The website is operated by JME Financial Services (Pty) Ltd an authorised Financial Services Provider, regulated by the Financial Sector Conduct Authority in South Africa under license no. 37166. JME Financial Services (Pty) Ltd is located at Suite 10, 21 Lighthouse Rd 201 Beacon Rock, Umhlanga Rocks, Kwa-Zulu Natal, 4320, South Africa.

JME Financial Services (Pty) Ltd acts as an intermediary between the investor and NAGA Capital Ltd, the counterparty to the contract for difference purchased by the Investor via Naga.com/za. NAGA Capital Ltd is authorised and regulated by the Financial Services Authority Seychelles (FSA) under licence No. SD026. NAGA Capital Ltd is the principal to the CFD purchased by investors on this website. Other group entities: NAGA Markets Europe LTD which is authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC) under licence No. 204/13.

RISK WARNING: Derivatives are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. Illustrations, forecasts or hypothetical data are not guaranteed and are provided for illustrative purposes only. JME Financial Services (Pty) Ltd does not render advice in respect of the CFD’s offered on this website. Before making an investment decision, you should rely on your own assessment. The Company’s disclaimer, conflict of interest policy are available on legal documents section.