June 8, 2021 | AtoZ Markets – CFD traders can make a lot of money in the financial markets. Unfortunately, many people believe that in order to make significant money, it will take that you already have a lot of capital. This mindset has limited the potential of financial markets to the big Wall Street financial firms and wealthy investors. This was mainly the case at the dawn of the financial markets. However, that all changed dramatically with the advent of CFDs, which expanded the options for the average individual retail investor.
Most investors prefer to trade CFDs or CFDs because you never have to own the underlying asset, which makes trading more affordable and in most cases more profitable.
The following topics are discussed in this article:
- What are CFDs?
- What are the pros and cons of CFDs?
- How a CFD trader can find a good broker?
- What are the best CFD trading platforms?
- The best strategies for a CFD Trader
- Leverage in CFD trading: What it is and how it works
- The best way to start investing with CFDs
- The 3 fundamental rules for CFD traders
What are CFDs?
What are CFDs? Acronym for Contracts for Difference, these derivative instruments are contracts that replicate the performance of an asset, taking advantage of its price changes.
In this context, the buyer (Trader) receives from the Broker the underlying value of a financial asset against payment, with the gain that will arise from the difference between the opening and closing price.
This approach can be applied to all tradable assets:
- Stocks;
- Currency Pairs;
- ETFs;
- Cryptocurrencies;
- Forex;
- Indices;
- Raw material
CFDs as we have seen in the bulleted list can be used in many markets, which is why they have become very popular in the world of online trading.
Most likely, CFDs were first created in the early 1990s and are believed to have been created by a London financial firm. The company created CFDs to hedge against losses on the London Stock Exchange. Investors preferred CFDs because of the lower margin required and the lack of physical exchange. In addition, CFDs have allowed investors to avoid certain taxes.
The rise of online investment in the late 1990s was accompanied by the introduction of CFDs by brokers for retail traders. Suddenly, retail investors were able to buy stocks, indices, and commodities that they didn’t have access to before. They were able to do this with a simple mouse click on a computer connected to the Internet. After this arrival in the investment community, the popularity of CFDs has grown exponentially.
What are the pros and cons of CFDs?
There are various pros and cons to investing in CFDs. A CFD trader needs to be aware of the benefits of CFDs, as well as the pitfalls associated with them, before deciding to invest in them. The more you know, the better you can understand the risks involved. This will allow you to take action to mitigate these risks as well as maximize your profits. The various advantages and disadvantages of investing with CFDs are detailed below.
Pros
There are many advantages to investing in CFDs over traditional brokers. One of these benefits is leverage, which allows you to have much higher market exposure while having a low initial deposit. For example, from a traditional broker, if an asset is worth $100 and you have $200, you will only be able to buy two shares. On the other hand, with CFD trading, you can buy 20 shares for $200 with a 10% margin requirement. (We have explained below how to leverage trading works.)
Another benefit of CFD trading is the potential tax breaks. Depending on the country you live in, with CFD transactions, you can avoid certain taxes that are levied on trades with traditional brokers. In addition, you are entitled to receive dividends from the shares, even though you do not actually own the shares directly. Basically, with a small fraction of the common capital required for a traditional broker, you can reap the benefits of owning stocks and receiving dividends.
Using CFDs to trade cryptocurrencies has various technical advantages over going directly to cryptocurrency exchanges. Usually, you need to create a wallet to store your cryptocurrency. You will also have to deal with a wallet in order to make transfers in order to participate in the cryptocurrency markets. However, with CFDs, you can avoid all of these technical requirements for trading cryptocurrencies. In addition, trading cryptocurrency CFDs is much cheaper than trading real cryptocurrencies.
Cons
Despite all the powerful advantages of investing in CFDs, there are several disadvantages to consider. One disadvantage is the increased risk with CFDs as you can access larger market positions. While CFDs provide more potential for profit with less capital required, they also have more potential for large losses if the market moves against you.
Due to the increased market power of CFDs, many traders start to get too greedy due to the greater potential for profit. Hence, it is important to maintain a well-thought-out investment strategy with proper risk management to match your individual risk profile. It is important to use stop losses and be aware of the size of your positions. Also, as with any type of trading, CFD traders need to be more careful in times of volatility in the markets.
How a CFD trader can find a good broker?
What is the yardstick for deciding whether or not to rely on a particular broker? In order to find a reliable and safe CFD Broker, you must check the company for various criteria.
By checking before opening a portfolio, it can be assumed that there will be no fraud. Particularly dubious companies take advantage of the ignorance of new clients in order to deceive them about the invested assets. Therefore, you must read this article in its entirety.
Please note that most online brokers offer CFDs and Forex together.
Safety and security for fund clients is the most important point for traders
Before registering with any CFD Broker you should check if it is a regulated company. Brokers without regulation or licenses are not safe for the client's money. AtoZ Markets has reported a lot about complaints and fraud from unregulated brokers. As a customer, you must check for the licensing and security of customer funds. If you haven't found any information, you'd better ask a CFD broker before signing up.
From our experience, online brokers that are officially licensed by a financial authority are safe and secure. You can make unlimited profits and withdraw your money without any problem. To find the best CFD BROKER you should look at further criteria for good. All companies in this survey are verified against this checklist.
Criteria for a good CFD broker:
- Official regulation and financial license;
- Security of customer funds (separate funds);
- Fast execution of transactions;
- Good trading data and charts;
- Free demo account with virtual money;
- Regulated and secure payment methods;
- Fast withdrawal of profits;
- Professional support and customer service in different languages.
On this website, we guarantee that any broker we recommend has been reviewed and proven to be reliable by our team. With years of experience in financial trading, we know how the industry works and how to get the best conditions for traders.
What are the best CFD trading platforms?
Today the popularity of CFDs continues to be high in the countries where they are permitted. Every day, traders now have a wide selection of CFD brokers from which anyone can easily diversify their trading portfolios.
In the table below you will find the most important CFD trading brokers in the world. They are the ones who offer free platforms to trade on.
- eToro
- OctaFX
- FBS
Who are these brokers?
eToro
eToro is the beginner's favorite CFD broker. Not only because it is very practical to use but above all because it is the only broker that allows you to copy, in a completely automatic way, what the best traders do.
The functioning of eToro is quite simple: a powerful internal search engine allows you to find the traders who in the past have obtained the maximum profit with the minimum risk. These traders (the famous Popular Investors) can be selected for copying.
From that moment on, their every operation will be replicated in our account: all automatically! Obviously, Popular Investors also use CFDs to invest in the markets, clearly the best choice to be profitable.
EToro benefits:
- Multi-regulated and licensed CFD Broker founded in 2007
- Over 3000 assets (forex, CFDs, real stocks, cryptocurrencies, commodities)
- Competitive spreads from 1.0 pips
- Fast execution and high liquidity
- Social and Coptic Trade
- Professional and convenient trading platform
- Good customer support for traders (phone and email)
- Free education and analytics
- Regulated Payment Methods (PayPal, Bank Wire, Credit Card, E-Wallets)
OctaFX
OctaFX is under the brand name of Octa Markets Incorporated and has been operating since 2011. The broker offers a trading experience to more than two million trading accounts. OctaFX caters to a wide variety of retail traders in over 100 different countries by providing them with the opportunity to trade currency pairs, cryptocurrencies, precious metals, market indices, stocks, and commodities.
OctaFX has won multiple international awards since its foundation. A multilingual customer support team is always prompt and to the point and the payments are processed by the most popular systems without delays. Also, the company is well-known for its social and charity activity.
Benefits of OctaFX:
- Multi-regulated CFD Broker;
- Free demo account;
- Minimum initial deposit $25;
- Direct access to CFD accounts in the market;
- Spreads from 0.0 pips (depending on the type of account);
- High leverage for each client (maximum 1:500);
- MetaTrader 4/5 platform;
- Customer support;
- Webinars, trading signals, and more.
Open your free OctaFX trading account
FBS
FBS is a leading Forex broker offering trading opportunities in a wide range of financial instruments that includes multi-market Forex, metals, CFDs, and more.
Established in 2009, FBS has won numerous prestigious awards including the Best FX IB program and best international Forex Broker. The CySEC and IFSC regulated forex broker is trusted in 197 countries for its unrivaled customer services, ideal trading conditions, and technological sophistication.
FBS benefits:
- Multi-regulated and licensed CFD Broker;
- They know how to serve customer desires;
- Competitive spreads from 0.5 pips;
- Fast execution and high liquidity;
- Professional and convenient trading platform;
- Good support for traders (phone and email);
- Regulated Payment Methods (Credit Card, Neteller, PerfectMoney, Skrill, Wire Transfer).
Open your free FBS trading account
The best strategies for a CFD Trader
There are many CFD trading strategies that you can use when trying to understand how to trade CFDs.
When investing in CFD, you have the option to go long or short. It is important to understand how both of these strategies work and when to use them. In addition, you will need to understand the assumptions of each strategy regarding future market price movements. Below are the details of long positions in the market and short positions in trades.
Long CFD position
A long CFD position is the purchase of a market position using a CFD. The goal is to capitalize on future appreciation of the underlying asset. You will go long in the asset market if you think the price will rise. The price at which you first buy an asset is called the entry price. The price you sell at is the exit price. You calculate your profit by subtracting your entry price from your exit price.
Here's an example for a long time on security. Let's say you purchased 100 shares at $2.00 with a 10% margin requirement. This means that you need to have $20 in your brokerage account to hold a $200 market position. If the share price rises to $3.00 over the next two days, you will hold a $300 position.
Of course, in real life, you will also have to consider any fees, commissions, or spreads charged by the broker. This will affect the overall profit from the trade. The commission depends on the broker and on the asset class you are trading.
Short CFD position
Going short when investing in CFDs is essentially the opposite of going long. This is known as short selling, which essentially speculates on a future decline in the price of the security. As with a long position, with a short sale when investing in CFDs, you only need enough funds to cover the broker's margin requirements for a particular asset.
On a short sale, the profit made is equal to the exit price subtracted from the entry price. For example, if you decide to sell 100 shares at an entry price of $10 with a 10% margin requirement, you would need to deposit $100 of equity into your brokerage account to hold a $1,000 position. If within the next two days the share price drops to $5, your position will be $1,500.
Also, as with a long position, when selling short, you will have to factor in the costs of making the trades. The broker may charge fees, commissions, and spreads. This can reduce your overall bottom line.
We also would like to mention some other strategies a CFD trader can use:
- Trading day: One of the principles of daily trading is that no position should remain open after the markets close, so as to avoid the additional costs and risks associated with holding the position overnight. the trader has to generate quick profits from small price movements throughout the day. This type of trading is suitable for full-time traders who have the ability to constantly pay attention to the markets;
- Position trading: With position trading, you have to hold on to an asset for a long period of time. Position traders will make far fewer trades than day traders;
- Trend trading: Trend trading seeks to profit from market trends. The positions that will be opened will be kept open as long as the trend continues, this means that trend trading can be a short, medium, or long-term strategy.
- Short-term: With this strategy, you have to find the trend by looking at the moving averages. When the trend appears to be persistent, a higher moving average can be used;
- CFD Trading and News: Good traders do research before trading. One of the most reliable strategies is to pay attention to the news in real-time. It is easy to find important events using an economic calendar;
- CFD Hedging Trading: This is a strategy to use if you are looking to reduce the overall volatility of your investment portfolio, especially if the market is unstable. You are selling a CFD for a similar number of an asset to protect yourself from losses. It can be done short-term over a period of days, but it can also be done long-term.
With these strategies, you can easily develop your CFD trading skills over time.
Leverage in CFD trading: What it is and how it works
One of the advantages of investing with CFDs is the ability to use leverage.
This means that a CFD trader can trade with higher amounts of money than you actually have. Leverage of 1:50, for example, will allow us to make a purchase of $500 while spending $10.
Obviously, this is a double-edged sword because, as the gains are amplified, so to the losses.
But now let's see how it works ... Basically, leverage is nothing more than a sort of "loan" of the online broker to the customer. But to protect himself, the broker, on the other hand, asks the client for a kind of guarantee called margin, which the user will have to pay.
In any case, the use of leverage is not mandatory, so it is always a decision of each CFD trader to choose whether to set it or not.
It is clear that if you do not know perfectly its mechanisms, including the benefits and risks, it is better not to use it and lose the entire capital that you've invested. Rather, concentrate, perhaps, on trading operations and advanced graphic functions.
The best way to start investing with CFDs
There is no secret formula for a CFD trader to achieve the desired success. However, the best way to start investing in CFDs is to experience as much as possible, first with a demo account and then with the live account.
Thanks to the former, even the novice CFD trader can learn the mechanism of transactions and understand the market without risking real money.
Once the investor has acquired all the necessary skills and feels confident, then he can start trading CFDs for real money.
The 3 fundamental rules for CFD traders
What are the 3 main rules for a CFD trader? We illustrate them below.
Patience
A quality that you are not required to obtain immediately but that will help you a lot over time will be patience, that of seizing the right moment to trade, that of choosing the right moment to enter the market, that of not running after money, but to wait calmly for it to get to you.
Greed will never get you to big results, those who focus too much on money ultimately don't get success trading.
The first aim must always be to practice, to train to earn, this is how you will succeed with consistency and precision over time.
Analysis
The second rule to follow is to do analysis, always be informed and on the piece, this is how experts dominate the CFD markets.
You have to be inside this world of financial markets, you have to deepen the news, take note of what can be useful to you, overcome laziness, and arm yourself with study and analysis that will allow you to always understand how, when, and where to operate.
This is how you will ensure a bright future in this business.
Discipline
Although some individuals who still call themselves traders, live this activity as a hobby while still managing to bring something home, the best way to trade with CFDs is to live this activity as a real profession.
In fact, trading is not leisure, indeed it could be a rather stressful activity and you have the task of being ready.
Sometimes you have to get up at 9 in the morning to analyze that particular asset that you know you want to invest in 2 hours later.
Sometimes you have to follow the market for several consecutive hours just to find the perfect moment to enter the market.
All of this takes discipline, but remember: discipline pays!
Conclusion
In the digital age, CFD trading is becoming more and more popular. This is an easy way to participate in the financial markets. Traders can invest in rising or falling prices with the leverage they want. CFD brokers currently offer a wide variety of markets to traders. Currencies, cryptocurrencies, stocks, indices, commodities, and other markets are available for trading. The fees are also low if you choose a good CFD broker.
In this article, we have brought you the top 3 providers that are tested with real money. They are very safe and offer good conditions for CFD traders. If you choose one of these you are on the right track to invest and trade successfully.
Happy trade!