You can earn a living from CFD trading if you put your mind to learning the business and creating strategies that reap huge rewards. However, it's not a business that you can jump straight into without any knowledge. You need to know exactly what CFD trading is, how it works, what the spread is, and what you can trade on. That's why we've put all of this and more into our article on the subject here. What comes next is our guide to trading CFD for beginners.
CFD Trading Explained
The first thing you need to know from this trading CFD for beginners guide is that the acronym ‘CFD‘ stands for ‘Contract for Difference.' You can learn more about it here. It's the name given to the contract between a trader and a broker. Relating to the change in an asset's value over a period of time.
With CFD trading, you're buying and selling these contracts between brokers and traders through an online provider. Put simply, when you buy a CFD, you agree to exchange the difference in price between an asset's price form when the contract was opened to when it's closed.
How CFD Trading Works
CFD trading is similar to spread betting. A trader never owns commodity, index, or shares. Instead, a trader is backing their money on whether they believe an asset's price will go up or down over time. If you expect an asset's price to go up, it's called ‘going long,' whereas an asset with a price you believe will go down is called ‘going short.'
When trading on a specific CFD, traders only need to put down a small deposit. For example, if you wanted to trade a CFD worth 100 pence, your initial deposit most likely be around 0.50%. This makes it much easier to spread your trades across multiple CFDs, spreading the risk alongside it.
Should you predict the outcome of a trade, seeing the asset's price increase, for example, the seller pays the difference between the price you paid to buy the CFD and its worth at the point of sale. However, if the asset's price moves in the opposite direction to your prediction, losing value in this example, then you would be expected to pay the difference between the new lower price and the initial deposit you made.
See below for an illustrative example of a single CFD trade.
Spread is another piece of CFD trading terminology that you need to understand from this trading CFD for beginners guide. It refers to the difference between an asset's selling price (also known as ‘the bid') and it's buying price (also known as ‘the offer,' ‘the price,' or ‘the ask'). It's ‘the bid' that is the lower of these prices, and that's what the trader can sell the CFD at. The higher price is ‘the ask,' which is what the trader can buy at.
Let's look at an example of spread. Should ‘the bid' of an asset be 124.6 and ‘the ask' be 125.4, the spread is the difference between them. In this case, that's 0.8. This is also the profit or loss that you stand to make from a trade. In this example, you'd make a profit. Were the numbers reversed, however, you'd be making a loss of the same amount. In that case, you'd need to pay the difference.
Fixed and Variable Spreads
There are several spread types that you'll come across in CFD trading, but the two basic types are fixed and variable. If you can get your head around these, you should understand the more complex types of spread as you gain more experience and confidence trading.
A fixed spread is straightforward. It's the safer trade to make out of the two. If you buy a CFD with a fixed spread, you know that the spread won't change during normal market trading hours. In the example, we used earlier, when the spread was 0.8, it wouldn't change on a fixed spread basis.
However, in the case of a variable spread, the figure of 0.8 can vary wildly. Usually, brokers will offer slightly better rates on variable spreads, enticing traders to buy in. While it's true that you could see that number of 0.8 increase by up to 5 points, it could do so in either direction throughout the day. This could make the difference between you making a lot of money or losing just as much.
Assets you can Trade
You're able to make CFD trades on several assets. From individual shares on the open market to stock indices, currencies, and commodities.
- Individual shares – could be anything, from shares in the butcher down the road to shares in Apple.
- Stock Indices – are slightly more complex. These are indexes made up of a selection of stock, usually within a particular geographical area.
- Commodities – are more visceral. Good examples are oil, gold, and silver, the price of which will alter drastically depending on public demand.
- Currencies – are very similar to commodities and shares. Their price goes up and down every day, and you'll place trades on the direction their value changes.
How to Make a CFD Trade
The actual process of placing a CFD trade varies depending on the broker you use. We've compared two excellent brokers here if you're looking for a couple to chose from.
Once you've chosen your broker, you need to assess what type of trade you're going to make. You should research the asset carefully and be as sure as you can be about the outcome before you put down your deposit.
It's always worth keeping more money in your account than you need. This protects you from any fees or issues if a trade doesn't go the way you think it will. It could seriously harm your reputation and career if you're unable to pay for a loss you didn't count on.
Try to make a mixture of trades. Look at assets you believe will go up in value, as well as down. It's important to use the news and other relevant information so that you can jump on trades as soon as possible.
One of the Best CFD Provider for advanced traders:
There are several CFD providers out there. No doubt, you'll use several of them over the course of your career before settling on one or two that you like to work with. We recommend Plus500 as one of the best CFD providers though. The company is a British international financial firm that offers CFDs across multiple asset classes and over 2,000 securities. They are listed on the stock exchange, and they disclose all of their finances each year, so you can see how trustworthy they are for yourself. To top it off, the company is monitored by a number of financial authorities, including the Financial Conduct Authority. They are a great place to start CFD trading if you're unsure about which broker to use. Please note that it is only possible to trade through CFD with this platform though.
Best CFD trading for beginners:
CFD overall should be handled with care since most traders lose money, however, the one we think fits beginners the most is Etoro since it's has a great user interface, read more in our etoro review here.
That is the end of the basics of trading CFD for beginners. You should now know everything you need to find a broker and start making your first trades. As I mentioned, there are other aspects to CFD trading that we haven't explored here. However, you'll pick these up easily enough once you've invested some time in the industry for yourself.