Contract for Difference (CFD) trading for beginners

A Contract for Difference, or CFD, is a contract between a trader and a broker that allows traders to speculate on the upward or downward price movement of an underlying asset. Here, we learn more.

As you develop your financial knowledge, you’ll come across Contract for Difference trades, which are very popular with traders.

What is a CFD?

A Contract for Difference, or CFD, is a contract between a trader and a broker that allows traders to speculate on the upward or downward price movement of an underlying asset. As the activity involves speculating on price movements rather than seeking to buy the underlying asset, the trader will never actually take physical hold of the underlying asset. Instead, the contract will define a price that must be paid against market fluctuations – measured by the spread (the difference between the buy and sell price). With cryptocurrencies, for example, a CFD contract allows a trader to enjoy the gains and take on the risks of Bitcoin trading, without needing to physically own a coin.

What sorts of assets come under CFDs?

CFD trades span a wide range of assets, including:

• Cryptocurrencies such as Bitcoin, Litecoin, Ripple and Ethereum

• Global indices such as the Wall Street and UK 100

• Foreign currency movements, such as GBP/USD or JPY/EUR

• Company shares, such as Unilever, Apple and Walmart

• Government bonds

• Interest rates

• Options

• Commodity markets, including cattle, gold, cocoa and oil.

Why are CFDs so important?

Futures play a vital role on the financial markets, ensuring that global prices are set for key commodities such as oil and that more complex financial markets, such as agriculture or mining, are supported and stabilised. CFDs open up trading opportunities to investors and provide further options for hedging, risk minimisation or opportunity maximisation, depending on the trader’s objective.

Why do traders like CFDs?

Let’s return to our bitcoin example. Traders like Contracts for Difference because they can enter into contracts designed to make them money on the back of the cryptocurrency’s price fluctuations – but they will not need to physically own the currency. Traders and brokering firms alike value these trading opportunities, and experienced investors can enjoy healthy profits from changing market conditions across the world, as the demand and supply for commodities changes. Many traders also like the excitement and fast-paced nature of CFD trading, especially with cryptocurrencies, as it challenges their knowledge and skill as traders. There are further benefits including:
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• A tax efficient means of making money

• No requirement to pay UK stamp duty on profits

• Extremely flexible, as traders can enter into contracts on rising (called going long) and falling markets (called going short) alike.

• CFD trading also offers excellent leverage, as a trader can use only a small amount of their own money to enter into a far greater value proposition – raising the stakes and the chance of winning big.

• Hedging capabilities – CFDs can be used as a hedge against possible losses in a physical investment opportunity by going short on trades.

The need for the right platform

If you are keen to find out more about CFD trading, then it’s vital to use the right trading platform. Market speculation is a fast-paced, high-octane activity with the ability to leverage your funds. This means that the gains – and the risks – can be magnified, and it is essential to invest in your training and knowledge. The right platform will offer you:

• A friendly and intuitive user interface

• Immediate, real-time access to market data to support decision-making

• A rich base of training and education resources to grow your own knowledge

• An easy mechanism for making cash deposits and withdrawals

• In-depth analytics that allow you to track performance and assess your gains

• Highly secure and reliable – with 100 percent uptime and the latest security encryption technology

• Access to a 24/7 support team when you need them.

Ready to enter the world of CFD trading? Then set up your account with Olsson Capital today for instant access to this exciting – and potentially lucrative – form of trade.

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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