What Are CFDs And How They Work
Online trading is increasingly popular in Nigeria. The country has the second-biggest Forex volumes on the continent. Foreign exchange is the largest financial market, but brokers offer a range of extras for additional profit. Contracts for Difference are virtual derivatives worth learning about. Here is how they work.
The Concept of CFD
As a derivative, this instrument is linked to an underlying asset. Today, you may find CFDs on precious metals, stocks, cryptocurrencies, oil and gas, and more. Whatever the basis, CFD holders do not own it. They merely speculate on price dynamics. The broker pays the difference between entry and exit — hence the term.
Suppose you know a lot about the oil market.
You could purchase CFDs on Brent or WTI.
When commodity prices rise, so do the derivatives. They always move in line with the underlying assets. You buy low and sell high, like in forex trading.
No actual barrels of crude oil will ever change hands. Profit in Forextime CFD trading is only defined by your ability to foresee market movements. This makes these instruments more accessible than futures, which are linked to physical delivery.
Range of Markets
With CFDs, you may diversify your investment portfolio easily. These instruments work in the same fashion whatever the domain. Regulated brokers like Forextime offer a vast range of opportunities:
- CFDs on stocks of the largest corporations;
- CFDs on commodities like oil and gas;
- CFDs on cryptocurrencies like Bitcoin;
- CFDs on market indices like GDAX.
- CFD Accounts
Most brokers offer many accounts for different investment purposes. For instance, the FXTM Standard account unlocks up to 14 CFDs along with currencies and spot metals. To open it, you need just $100, and CFDs may be traded with floating leverage.
Thus, you tap into a diverse range of instruments from the same account. The exact conditions depend on the provider. Naturally, working this way is more convenient than switching between accounts.
Pros And Cons of Leverage
CFDs are often heavily leveraged. This means you may trade them using a chunk of your broker’s funds. The proportion varies. For instance, leverage of 1:100 allows you to open positions worth $10,000 when there is just $100 in your account.
For traders, this is an opportunity to make high profits. On the other hand, if your strategy fails, you will wipe out your balance in seconds. Unsurprisingly, beginners are advised against trading on margin. Stick to what you have until you develop the necessary skill set and confidence in your chosen market.
How to Learn
As CFDs are increasingly popular, there is no shortage of educational content. First, your broker should provide basic guidelines — articles, tutorials, etc. Secondly, you may find a plethora of resources yourself. Even YouTube, the largest video sharing site, has dozens of channels dedicated to trading.
Begin by honing your skills in the demo account.
This applies to any new instrument you explore. Do not venture into the live market without the necessary acumen. While you can limit risks to an extent, they will never be reduced to zero, particularly when you trade on margin.
What Software Is Used
When CFDs are offered by Forex brokers, they are traded using their platforms and apps. Thus, if you are already trading currencies, you may often stay in the familiar digital environment.
Universal solutions like MetaTrader 5 allow instant access to a wide range of markets. It is possible to trade CFDs, currencies, spot metals, and more from the same account and system. Some companies develop their own apps.
The FXTM Trader app is a notable example. It unlocks over 250 different instruments including assorted CFDs. There are derivatives linked to stocks, market indices and commodities. You can benefit from prices for:
180 major company shares;
UK Brent (Spot), US Crude (Spot) US Natural Gas (Spot);
CFDs on Indices representing major Asian, European, Australian and American securities.
Is Your Broker Reliable?
Zoom in on the background of your provider. How many years have they been in the industry? How many clients are they serving? Top brands operate in several countries and have licences from different jurisdictions. They flaunt industry awards, and their customer service is praised by experts and users.
Collect as much information as possible before registering an account. Check review sites and trader communities to see whether the company delivers on its promises. Do not base your decision on a single parameter like feedback. A combination of factors will help you make the right choice.
