E What Is CFD Trading?

CFD trading, otherwise known as contract for difference trading is the process of taking a position the value of a contract that mirrors the value of a stock or commodity.

People have been trading CFDs for the past 15 years and it continues to increase in popularity. The development of high speed internet has allowed this type of market to open up and gain the recognition that it has today. There are many advantages and reasons why people prefer trading CFDs over buying and selling stocks or other forms of investments. Below, we will go over many of these reasons for you.

CFD Trading Works Similarly to Stock Trading

Just like buying and selling a stock, you can buy or sell a CFD. You can also short a CFD in the same way that you would with shares. The price of the CFD will fluctuate based on a number of factors in the same way that the price of the stock of a company would.

Going Long on a CFD

If you think the CFD will go up, you should buy it. This is called going long. If the price is higher when you sell it than when you first bought it, you will make a profit on the trade. If the price is lower when you sell it than when you first bought it, you will take a loss on the trade.

Shorting a CFD

You can sell a CFD upfront if you think it will decrease in price. This is called going short. When you take a short position, you must “buy” it back in the future to close your position. This is called buying to cover.

If the price is lower when you cover it than when you first shorted it, you will make a profit on the trade. If the price is higher when you cover it than when you first shorted it, you will take a loss on the trade.

If you are familiar with trading stocks, you should already see how similar trading CFDs is to trading shares on the stock market.

What Is the Difference?

The main difference between a CFD and a stock is that you don’t have to actually purchase and sell a portion of the company that is being traded like you do if you buy a share of a company. Instead, it is a position that you are taking that is based on the value of the stock as opposed to buying the stock itself. This allows you to have greater flexibility over what you can do with it.