Top 5 factors to consider before investing in CFDs
Contracts for Difference, commonly known as CFDs, are tradable instruments that allow you to trade an underlying product without having to actually own the asset. They can be a commodity, share, index, forex, or a cryptocurrency. The numerous advantages associated with using them have made them very popular over time. If you are tempted to try them out, we’ve prepared 5 important things you need to consider before investing in them. Read more below!
1.You can trade short or long
One of the greatest features of CFDs is the possibility to trade on both the long and the short side of the market. When you go long, you open your trade with a buy order when you anticipate a rise in price and use a sell order to exit the position. On the other hand, when you go short, you open a trade with a sell order when you anticipate a price fall and you close with a buy order. This enables you to profit from an upward, as well as a downward trending market.
2. You can access the world’s financial markets from one platform
Online CFDs brokers can provide you access to the most exciting financial markets, all from one platform. If you want to trade forex, stocks or even cryptocurrencies – you can do it all by opening an account with an online firm. At its core, a CFD represents a contract between two parties to settle the difference between the opening price of the CFD instrument that is traded and the price it closes at. Make sure you pick a broker that is capable to deliver fast, professional and secure services. TradeLTD.com is a broker that considers these characteristics its top priorities and offers you the ideal platform and tools you need as a beginner.
3. CFDs are a leveraged product
CFDs operate by using leverage, which means you are able to deposit a small percentage of the full value of the underlying asset in order to open a position. Simply put, you can enter larger positions by investing a small amount of money. This situation has two outcomes, you can either profit by investing more than you can afford, or you can end up losing more capital than you own. With this thought in mind, taking risk measures is paramount when trading on leverage! You can create a risk management plan that include a number of measures you consider relevant, such as a limited number of open positions, a limited amount of leverage to use, or a thorough analysis of the market conditions when you enter the position.
4. It is important to use order types when you trade CFDs
Professional traders know that CFDs trading strategies go hand in hand with various order types. Because there’s a significant volatility involved, as well as a certain amount of leverage – placing orders with your broker can be a game-changer and save you or bring you a lot of money. Most CFDs brokers put at your disposal a large number of order types, but it is up to you which ones you consider relevant for the trading strategy you’ll approach. The most common orders are the stop order (closes the position below the current market price), the limit order (lets you place an order to buy/sell at a lower/higher price than the market is trading at in that moment), and the market order (lets you enter at the current price).
5. There can be additional costs if you hold a position open overnight
Depending on the broker you’re trading with, you might have to pay a few extra bucks to hold long CFD positions overnight. In case of a short position, some brokers created programs to give you rebate. Make sure to check all the information provided to you by the broker regarding fees and commissions. Don’t hesitate to contact them and discuss if any information you want to know isn’t transparent. It is in your best interest to trade with a peaceful mind.
CFDs hold a number of advantages that not many other tradable instruments do and this is what makes them so desirable for investors. The low-costs, as well as the possibility to access all the financial markets from one place represent two major advantages that can bring you superb profits by investing a small amount of money. Not to mention that CFDs are the most efficient way to diversify your investment portfolio. The 5 factors we discussed in this article will help you get off on the right foot in your first CFDs trading experience so don’t waste another minute and begin your journey!