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What are CFD's and How Can I Trade Them?

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This article is published in collaboration with Scutify, where you can find real-time markets and stock commentary from Robert Marcin, Cody Willard and others. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

CFD stands for 'contract for difference'. A CFD or contract for difference is an agreement between two individuals or entities to exchange the difference between the opening and closing price of a contract. CFD trading is often espoused as a way to make money in the market. But, what is CFD trading actually? Let's review what CFD trading is, how you trade CFDs and how you can make money with them.

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An Overview of CFD Trading

A CFD is a contract that you can enter regarding the price of almost any product. You can enter CFDs for commodities, bonds, stock shares and stock indices. You don't actually own the underlying instrument or item. Instead, you are only trading based on the change in the price of the item.

There are several reasons why CFDs are popular. You can trade on either falling markets or rising markets. Conversely, if you own a stock, you only profit if it is going up or you sell it high and buy the shares back when the price is lower. CFDs can allow you to use a small amount of money to control a larger value position, but you don't have to invest that larger amount; for example, your CFD is for 10,000 shares but you only had to put down a small percentage of that amount. CFDs can be used as a risk management tool, such as taking CFDs to pay out if your stock price or commodity price falls. You lose money because the investment declined in value, but the CFD's payout reduces that loss.

Luckily, there are a lot of videos online created by fantastic video companies like Spiel, that explain exactly what CFDs are and how to trade them. It's always worth doing as much research as you can before getting started.

How You Trade CFDs

You can trade CFDs on a CFD trading platform, just as you could trade foreign currencies on a forex platform. To trade in CFDs, first set up an account on a CFD platform. Then you open a CFD position by selecting the CFDs you want to trade and selecting the price points. You may or may not have to pay commissions to trade CFDs based on stocks and stock indices.

At the end of a day, any CFD position open may result in a holding cost charged to your account. The holding cost could be positive or negative depending on the holding rate the platform charges and the direction of the item's price versus your position.

How You Can Make Money with CFDs

For every point in price the instrument moves in the direction you chose, you gain multiples of the number of CFD units you bought or sold. If the trend goes in the opposite direction of the one you selected, you'll lose. Your gains and losses are based on the full value of the CFD position, though you only deposit a small percentage of its value.

The spread is the difference between the buy and sell prices. You enter a buy trade using a buy price and exist using the selling price. The narrower the spread between these two price points, the less the item's price needs to change before you profit.

Trading CFDs allow you to make money based on the changes in the price of nearly anything that can be traded on the market but don't trade unless you fully understand how CFDs work.


This article was written by Adam Monson for on .

This article published in collaboration with Scutify, the best app for traders and investors. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

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