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An Introduction To CFD Trading


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									An Introduction To CFD Trading

This is a really simple yet useful tutorial on CFD trading which will get you up and running very
quickly if you're new to CFD trading.

When you finish this article, you'll understand how CFDs work, what makes them extremely
lucrative, and understand the costs involved in CFD trading.

CFD stands for Contracts For Difference, which is a derivative product, where you profit from
changes in the prices of stocks and shares.

For instance, if you purchase a CFD on a stock that's $5.00 and the price increases to $5.50, then
you profit from that change in price. So if you bought 1000 CFDs, then your profit is $500. That
is, the value of the CFDs mirror the underlying stock prices, and you can profit on this

The main reasons why CFDs are a hugely popular trading product, and understandably so, are:

1. CFDs are traded on leverage, and this leverage is often 10 to 1, with some CFD brokers
providing 20 to 1 leverage. This implies that a trader with a small float can make decent profits
from trading the stock market by using CFDs. For example, you may have a stock trading system
which makes a 30% return each year. On a $5000 float, this is $1500 profit in one year. With
CFDs, because of the leverage, the same system can right now produce a 300% return, which is
$15 000 profit in one year.

2. You can just like easily short sell CFDs as well, and therefore profit from falling markets. This
significantly boosts the profitability of a trading system because trading opportunities increase
significantly, and the fact that you can profit from both bull and bear markets.

3. The costs in CFD trading are reasonably low when compared to stocks. This is particularly so,
since for a similar and often smaller cost per trade, you can gain 10 or greater times the results
from a trade because of the leverage available. The two main costs in CFD trading are interest
and leverage. We will come to these in a moment.

4. You can set automatic stop losses. This implies that it will take you less time to trade, remove
the emotion from exiting a trade when you should, and enable you to exit as the stop is hit, not a
day later. You thus avoid the slippage because of getting out of a trade later than when you

5. You can place all of your orders in the evenings. With numerous CFD providers, you can
place orders to enter a position the night before. For individuals who are working, this is an
excellent advantage as they can do all their trading (place their orders to enter and their stop
losses) in the evenings, and not need to be at the computer screen or call their broker during the
day. Also, if they have any stop losses which need adjusting, they can do so in the evenings as
well. Their trading routine with a mechanical system could be about 10-15 minutes daily.
So these are the advantages of CFDs that have made trading accessible to a lot of people since
they provide large returns for a modest float, and can be also traded once a day as well.

Now, we pointed out that there are 2 main costs in CFD trading. Let's have a closer look now at
each of them:

1. Commission. With some CFD providers, there is in fact no commission. This also
significantly boosts the profitability of your CFD trading systems, and also the fact that you can
benefit hugely from the leverage. With other CFD providers, there may be a commission of say
0.15% of the trade size or $15, whichever is greater, each way. These costs are similar or less
than the commission related to stock trading, especially when you consider that the multiplied
profits that the leverage gives you.

2. With CFDs, there's interest charged for long positions which are held overnight. For short
positions, the interest is paid to you. The amount of interest charged is normally a reference rate
plus roughly 2%, and the interest paid is generally the same reference rate minus roughly 2%.
And the reference rate is usually a major bank's overnight interest rate.

For instance, the interest rate charged for overnight held long positions may be 7.5% or 0.075
each year. To calculate how much this is for a trade, we have to make it "pro rata". That is, we
would need to divide the 0.075 by 365, multiply it by the number of days in trade, then multiply
it by the trade size. For example, for a trade size of $10 000, held for 14 days, the interest cost is
about $28. Not a huge cost. For a short trade, the interest is paid to you, so will offset the cost
rather than contribute to it.

So there you have it.

You right now comprehend the advantages of trading CFDs and why they're a trading instrument
that permits people with a modest float to make very decent returns, and also understand the
costs involved with trading CFDs.

Toget more information about CFD trading, look out for part 2 of this article.

If you'd prefer to learn more now about CFD trading, visit this page with a comprehensive
tutorial on CFD trading.

Getting the best information on CFDS is no easy task nowadays.

If you are looking for more information on CFDS, then I suggest you make your prior research
so you will not end up being misinformed, or much worse, scammed.

If you want to Compare CFD providers, go here: Compare CFD providers

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