What is CFD trading
In this article we are going to try to explain what CFD trading is and how it really works.
CFD trading is very high risk and I do not recommend CFD trading to anyone. When you buy a CFD you risk losing a lot of money. It is important that you understand that:
- You can lose more money that you invested.
- You can lose more money than you have in your brokerage accounts.
- You can lose more money then you have.
If you lose more money than you have in your brokerage account then your are responsible to settle this debt with the broker by depositing money to your account. The broker has a legal right to collect the money you owe them.
There are too many investors out their that have tried CFD trading without understanding how they work and how much they can lose that have lost their entire life savings. Some investors have lost house and home after losing a lot of money because they did not understand that risk they where exposing themselves to. Do not become one of these horror stories.
A first look
A cfd certificate is a type of financial instrument that is based on another asset. CFDs allows you to to make leveraged trades on a large number of different assets. Leverage trades allow you to make large profits from small increases or decreases in the assets value. The maximum leverage that you are allow to use can vary between different brokers and between different types of assets. You should be able to find a broker that allows you to trade FOREX based CFD certificates with a leverage of up to x500 and with stock based CFDs with a leverage of up to 250. It is important to understand that you will never own the underlying asset when you trade CFDs.
CFD certificates are very popular among day traders as CFDs allow them to make large profits on small investments. When you invest in a x 250 stock based CFD you will make or lose the same amount as you would if you invest 250 times your investment into the stock directly. Investing USD1000 in a stock allow you to make them same profits ( or loses) as you would make if you invested 250 000 in the stock directly. This makes it possible to make a living from day trading even if you do not have enormous amounts of money.
CFD certificates are designed for short term trading. In most cases traders will sell them during the same day as they bought them.
How much can you earn
There is not limit to how much money you can earn while trading with CFD certificates and there is no limit to how much money you can earn from a single transaction. There is no limit to how high the valuation of a stock, or other asset, can rise. In rare cases the stock price of a certain stock can go up a lot very quickly and if this happens you stand to earn huge amounts of money from your CFD certificates.
How much can you lose
Your loses are, unlike your potential profits, not limitless. There is a limit to how much money you can lose when you buy a CFD certificate. The underlying financial asset can not sink in value below zero. You can therefore never loose more than the CFD price multiplied with the current asset price.
Your loses can be large but there is a limit to how much money you can lose. You can limit your loses even further by using stop losses to close your position if the asset price sinks below a certain value.
Overnight fees
CFD certificates are as earlier mentioned designed for short term trades. They are designed to be sold the same day you buy them. If you want to keep your CFD certificates overnight then you will need to pay an overnight fee. The overweight fee is designed to cover the brokers cost of hedging your position on the open market (buying the asset). The overnight fee is usually based on the national interest rate plus a certain percentage. The fee is usually small put is despite this incredible profitable for the broker since the total value of the CFD:s kept over night can range into the billions. The fee is small for each individual trader but it adds up.