Starting CFD Trading and What It All Means

A contact for difference (CFD) is a lucrative source of income for many traders that are involved in the trading of shares and markets. CFD trading is often the preferred online trading strategy in comparison to the regular buying of shares due to some of the reasons we will highlight below. Day trading restrictions do not apply to the CFD market. The novelty of this is based upon the flexibility and potential for earning significant profits.
So How Do You Profit From CFD’s?

Traders receive profit from a variety of contracts including currency exchange, indices, commodities, binaries, and various options. Profit typically occurs as a result of changes in stock prices and shares. For these reasons, online CFD trading is popular and provides the option to “go short” or “go long”. The technical details may be overwhelming for the novice; however, beginners are encouraged to learn the basics of trading stocks and approach this strategy with caution.

Leverage and Risk

Leverage is a very important concept to understand about CFD trading because you use it to achieve increased exposure on your positions. Online software programs offer the convenience of placing “stop losses” with a click of the mouse to lock in profits or minimize losses. Several commercial brokers deliver guarantees on the stop loss order at your predetermined price. This is because the market moves quickly and changes may occur without warning.

CFD trading accommodates traders with attractive opportunities to earn profit from rises and falls in the financial market. Traders are allowed to trade shares they do not own. Significant profits are achievable when leveraging as the chances are optimized.

Trading Education

The primary advantage of CFD trading includes education sessions for interested parties to learn how to maximize their earnings and learn how to navigate around the financial market. Most of these courses are detail-oriented and cover the highly technical nature of CFD strategies. There are numerous continuing education opportunities through online seminars and consultations from a private account manager. The account manager typically provides advice and step-by-step directions during your first couple of transactions.

The majority of CFD brokers provide real-time prices and news about the global markets and permit online trading direct from the provider’s platform. Traders enjoy the ability to gain trading power by managing a diverse portfolio in one centralized location.

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Contracts for Difference (CFDs) Explained in Full

Depending where you are trading Contracts for Difference (CFD) in the world, there are a few common features of these leveraged trading instruments.

One main feature that traders choose to utilise when trading CFDs is their leverage. Instead of paying full value for the trading transaction, the trader only pays a percentage (a fraction) of the total position when opening the position – this is called the Initial Margin. This margin allows for leverage trading plays, which allows for increased exposure to the underlying share price movements unlike if you buy the underlying securities themselves.

Because Contracts For Difference are traded on margin and the prices of the underlying securities fluctuate during market hours, the dealers have something called Mark to Market. The margin is actively marked to the market price – which means the percentage is actively being calculated as the share price moves. You must keep a margin on all open positions over the required level including any market profits or losses (paper profits and losses) as long as the position is open. If the trading position moves against you and reduces your cash balance and you end up in the red below the required margin level you will receive a “Margin Call” and will need to fund the account to maintain the position otherwise your CFDs would be automatically liquidated.

A CFD can be Traded in Rising or Falling Markets

Trading in CFD allows the trader to easily take a long or short position on the market or any security that is provided by any CFD dealer. That means the trader can trade both rising and falling markets. You can profit when the share price goes up and you are long, and you can also profit when you have a short position and the underlying shares fall. When you buy the CFD with the expectation that the underlying shares will rise, you are taking a long position. When you sell or short sell the CFD with the expectation that the underlysing security will fall you are taking the short position.

No Stamp Duty, Tax Implications on CFD

Don’t take my word as gospel but depending where you are with trading CFDs, you aren’t physically buying the underlying shares or stocks so you don’t have to pay stamp duty. Other tax implications for trading CFD can be that you can register your trading activities as a business.


Instead of a brokerage, CFD’s have commissions, which is basically the same thing. The CFD commission is calculated on the total position value and not just the margin paid.

CFD Overnight Financing

CFD’s have overnight financing. A consequence of the leverage is that you are basically borrowing money – and someone needs to be paid the interest. So when you hold a position open overnight you’ll get a finance charge for that benefit. Long CFD positions attract an interest charge of 1 to 2 percent above your national bank’s lending rate and short positions pay interest but 1 or 2 percent below your national bank’s official lending rate. This interest on the position is calculated daily with the application of the interest rate on the daily closing value of the position. (Daily closing value is the number of shares you hold and the closing price of the underlying shares).

Flexibility in Trading Market Sentiment

Trading Contracts For Difference offers the trader flexibility in trading market sentiment. There are CFD’s that allow you to trade specific shares, or market indices if you have an overall market sentiment or even sectors and specific international currencies.

CFD and Risk Management

CFD providers commonly provide risk management facilities because of the high risk nature of leveraged trading and the double edged sword effect. Many of these CFD dealers provide Stop Loss, Limit Orders and If Orders so market traders can actively manage their risk in trading CFD’s.

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