CFDs or Contracts For Difference essentially allow you to invest in the price movement of various financial instruments in both directions—increases as well as decreases—without the need to purchase the underlying asset. These instruments include commodities like gold, oil, wheat and coffee, shares of today’s leading companies including Apple, Microsoft, Coca-Cola, McDonald’s and many others, headline-grabbing cryptocurrencies like Bitcoin, Ethereum and Dogecoin, currency pairs such as EUR/USD, USD/JPY and GBP/USD, global indices, and even ETFs (Exchange-Traded Funds).
But as exciting as all this sounds, online trading CFDs comes with risk, just as with any form of trading, and the key is to take the time to educate yourself about CFD trading in general, as well as the financial instruments you include in your portfolio. Traders should get used to the idea that the education process doesn’t end after one week, or one month, but is ongoing. Even the most experienced traders keep on reading and learning, because so much in the business world changes and needs to be understood afresh all the time.
Let’s take a look at five things CFD traders should know before rushing out to the online trading platform.
- Choose CFDs for the Right Reasons
One reason a trader might choose to invest in CFDs is because it provides market access without the need to buy and store any assets (for example, commodities like barrels of oil or gold bullion), or because they want to get more involved in the crypto trading arena but don’t want to purchase and hold any actual cryptocurrency. CFD trading allows a trader to invest in market volatility by opening a Buy deal if he thinks the price will increase, or a Sell deal if he thinks the price will decrease.
For example, let’s say a trader reads a news item indicating that Ethereum’s price will shoot up in the next 24 hours. He checks the crypto’s historical price movements going back some time, and he follows up by reading market analysis on the issue, after which he remains convinced that this price hike will occur on time. He opens a CFD “Buy” deal on Ethereum for those 24 hours. If Ethereum’s price does rise in that day, he will see earnings from his deal; if the price drops, he will lose the money he put into the deal. The same kind of deal can be done if a trader believes the price of a financial instrument, whether it’s crypto or Microsoft shares, will drop in a certain time period. He opens a “sell” deal on Microsoft shares for that period and then watches to see if the share price drops, in which case his earnings will come in. This can be done with many other financial instruments too, including those we’ve mentioned above.
- Choose the Right Trading Platform for You
You’ll want a trading platform that’s straightforward and intuitive so you can easily get the hang of things. Aside from this, the platform should set you up with the most useful trading tools like live charts (to give you quick readings of current rates), trading signals (to stay on top of key price movements), indicators (which come in a few varieties and can be learned about in time), and an economic calendar (to keep you appraised of key market events). Basically, tools and features which can help you make more informed online trading decisions.
- Make Sure Your Broker is Licenced and Regulated
This ensures your funds will be managed securely and that your broker won’t involve himself in illegal practices like fraud. Find a broker that has some experience in the business, too; this adds to the sense of security you can feel about who’s handling your money.
- Educational Materials
Rather than just provide a trading platform, a good broker should offer you educational resources such as video tutorials and trading guides that are easy-to-follow and straight-to-the-point, so you can enter the markets with a well-rounded understanding and open trading deals based on solid information and analysis. Even if you’re well on your way in CFD trading, you may realize you never truly understood a certain trading concept, in which case you can just look it up and find out all you need within the platform.
- A Variety of Instruments
As you gain experience, it’s possible you will want to expand your portfolio to include new instruments. If your research leads to believe a certain instrument will go up or down in price, you’ll want it at your fingertips. Therefore, the broker you choose should offer a wide selection of key instrument categories including commodities, forex pairs, ETFs, cryptocurrencies, indices, and big company shares.
Don’t rush your CFD online trading journey, rather take your time and gather as much information and as many skills as you can along the way. iFOREX is a leading global broker with over 25 years of industry experience and an education-focused approach to trading. Sign up today and start making more insightful trading decisions.