CFD Trading Explained
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Those looking to bolster their bank balance often turn to investing as a means of supplementing their primary income. Flexible, diverse, and potentially very profitable, it offers a wide range of markets and mediums to choose from, and most would-be traders will find that there are a variety of options to suit their needs, attitude to risk and budget.
One of these options is CFD trading, which a lot of novice investors are initially confused by. The terms and jargon used by professionals can make it hard to break it down into a more digestible description, but the concept is actually a relatively simple one. If you’re looking at methods to suit you, then here’s a quick guide to help you decide whether CFD trading could be your ideal option…
What is CFD Trading?
‘CFD’ is a simple abbreviation of ‘contract for difference’. Simply put, this is an agreement between two parties to exchange the difference between the opening and closing price of a contract. This means that when people trade CFDs, they’re not buying the underlying asset, but speculating on movements in the asset’s market value instead.
How are CFDs Traded?
There are two ways to trade CFDs: by going either ‘long’ or ‘short’.
If a trader goes short, and sells, they will profit from a fall in price. Thus, if they believe that the market value of a company will decline in the short term, they could sell the contract, and profit as prices fell. It is this ability that makes CFDs such a useful tool for hedging.
If, on the other hand, they chose to go long, and buy, they would benefit from a rise in the value of the underlying asset.
This capacity to profit from movement in any direction is a key part of their appeal, and lends a welcome flexibility and freedom to trading CFDs.
How Does Hedging Work with CFDs?
As we mentioned above, one of the primary lures of trading CFDs is their potential as a tool for hedging. Hedging provides a means of offsetting losses in an existing portfolio, and many see it as a useful safety blanket in high-risk scenarios.
The easiest way to explain how hedging works is by using an example. Lets imagine that you own $10,000 worth of shares in a venture, and you fear that the value of its share prices is about to fall. You could short sell the equivalent worth of your investment through a CFD trade, ensuring that however the market moved, you would always remain in the black.
Useful, flexible, and potentially very profitable, CFDs have a growing following, and their popularity looks set to increase even further over the coming years. If you’re already investing in stocks and are looking to diversify your portfolio, or are considering trading and wish to build a strong foundation to work from, then CFDs could be the ideal investment instrument for you. Why not contact a broker like FxPro today and give trading with them a go?
Photo courtesy of: edar
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