What are CFDs?
When you trade CFDs
, you enter an agreement with a trading company or stock broker to exchange the difference between the closing price of a contract and the opening price of a contract.
You can buy CFDs (go long) and sell CFDs (go short).
Traders tend to use CFDs to trade shares and indexes, but there are some trading companies who allow you to use them to trade currencies.
Are CFDs suited to you?
As with all trading instruments, the first thing you need to consider before deciding whether or not to trade CFDs is risk.
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CFDs are geared products. Gearing magnifies the price movement in the underlying shares or index. This works great if a trade goes the way you want it to, but if a trade goes against you, you could end up paying out more than you initially put down.
With many trading companies offering CFD trading, you can open an account with a relatively small amount. In some instances this is just R2,000. If you trade CFDs through a stock broker, the minimum amount tends to be higher.
This lower deposit amount is less than what you’d need to open a single stock futures account with your stock broker.
In comparison to other trading instruments, CFDs have very transparent pricing as you trade the spot price. This price doesn’t take into account future events like dividends.
The funding for holding a CFD trade open is also calculated daily, which you may find beneficial as you can see exactly how much a trade is costing you on a daily basis.
If you haven’t tried trading before, you need to weigh up the risks of trading any instrument.
It’s also a good idea to use a demo account first before committing your cash. This lets you see if your strategy works well and if you’re suited to trading geared instruments.
So there you have it. How to know if CFDs are for you.
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