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Thinking of opening a CFD trading account? Here’s what you need to know

What is a CFD trading account?

by John Adam

A CFD trading account (or Contract For Difference) is different to a standard stock market account for a number of reasons. The primary difference is the way they operate. Unlike when you buy a standard share on a stock market, and therefore become a shareholder in that company, CFDs are bought independent of the company. Instead of investing only for the long term and essentially the company’s profitability to increase, CFDs are traded based on the underlying price, no matter the company or commodity. The investor can also speculate on whether the company or commodity will see a price increase or decrease, and the CFD will allow the investor to prosper in either situation.

There are two ways to use your CFD account, and it depends if you think the price of the asset is going to make a profit or not. If you think that it will, you will “go long”, and if you think that it will not, you ‘go short”. Trading both sides of the market is a unique feature of a CFD trading account, which can make things more interesting, but also a bit more risky. If you’re looking for a unique type of investment that’s different from the usual standard, find out more if a CFD trading account is the best choice for you.

In order be successful trading with CFD accounts, you need to understand more than just how to trade, buy, and sell on the market, because Contract For Difference trading is not set up the same way as normal stock trading. That’s why it’s important to be informed about other important terms and how they impact the choices you make.

Interest and Other Things You Need To Know

Most trading with a CFD trading account takes place all on the same day, which is also known as intra-day trading. Most of the time there is no interest on intra-day trading. However, sometimes you will earn interest for going short (unless it is negative interest), but you will most likely have to pay interest when going long because going long usually takes more than just one day.

Another feature of these accounts is that that you are trading on the margin, which in turn gives you leverage. Margin means that you do not need to put down the whole value of your investment depending on the percentage of the margin. This is where the element of risk really plays a big role. Trading on margin, or using leverage, means you can significantly increase the return of your investment, but if things don’t go the way you plan, you can lose a lot more money than you expect, as well.

There are two other terms you need to know: bid and offer. The bid is the price at which you can sell, and the offer is the price at which you can buy. The difference between the bid and the offer is what’s known as the spread. Your profit or loss is determined by the difference in the number of units you started with, and the direction you bet it would go in. The difference in price times the number of units determines your profit or loss.

There are also fees, as with any type of investment banking. You must pay a commission to enter and the exit and the market, and there may be broker's fees as well. Make sure you are aware of all the risks and fees associated with CFD trading before you enter the market.

*This post was published according to the "Contributed Article Terms and Conditions"

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