Trading CFDs as an entrepreneur – The good, bad and the ugly
If you are looking for an excellent place to invest your savings, then CFD trading is one of the best places to invest your funds. Tom Wellington, one of Olsson Capital’s top financial advisors, confirms that FD trading is common among financial traders and it is also very profitable. In CFDs trading, you will be speculating the prices of securities like metals, indices and energies.
The most popular metals usually are those with higher values like copper, silver and gold. When talking of Indices, it refers to the portfolios of stocks which represent a particular market sector. Indices are the plural form and the singular form of it is Index. An example of an index is the Dow, which is commonly referred to as the Dow Jones Industrial Average (DJIA). The DJIA is a figure derived from the stocks of the 30 largest companies in the US that form about 25% of the US market. There are other many indices, although it will depend on what your broker offers.
Energies refer to derivatives of financial markets whose underlying security is an energy product like oil, natural gas and electricity. In most cases, you will find that those brokers who offer Forex trading will also include CFDs trading. Although CFDs are lesser volatile compared to the Forex market, they are the second most traded market after the Forex markets.
One of the most critical aspects of CFDs is that the underlying assets from which the derivatives are obtained from are fast moving goods whose values control the economies of the world. Therefore, CFDs trading is something that you can depend on to give you substantial profit.
The price of CFDs is determined by the demand and supply of the underlying assets. For example, when you look at the cost of a security like the Dow Jones Industrial Average (DJIA) index, you will realise that its price is determined by the supply and demand of the shares of the 30 companies involved. Also, if you look at the cost of energies, the rate of each asset will be determined by the supply and demand of the underlying assets. It makes CFDs trading very interesting since it is linked to assets which are tangible and things that you can follow up and analyse.
As with any trading venture, there are a few disadvantages of trading CFDs to look out for as well. One of the disadvantages, although this applies across all the financial markets, is that CFDs trading is very risky and if you place wrong trades, you could end up losing your funds. Leverage in margin trading can be double-edged. Thus, wrong trades will translate to massive losses, especially since the markets are highly liquid.
With that said, let’s have a look at the following advantages of trading CFDs.
Margin trading
Margin trading means that you only have to deposit a small amount of the full amount that is required for a creating trade. Your broker allows you to hold a trade that is worth more than what you have set aside for the trade. Margin trading magnifies your profits but at the same time increases your losses in case your speculation is wrong.
The trading charges are less
Most brokers will only charge on the spreads when trading CFDs unless you are trading shares CFDs which will be eligible for commissions. There are also swaps which are charged in case your trade stays open overnight. However, the amount of swap will depend on your broker. Some brokers offer accounts which are swap free like the Islamic account. You will, therefore, be required to check on the number of swaps that your broker charges.
Hedging
Most brokers have no issue with hedging CFDs. However, this will entirely depend on the broker since there are brokers who do not tolerate hedging at all.
High liquidity
The CFDs markets have a high liquidity and they are also highly volatile. It makes the markets very promising for traders since the daily market price ranges are large thus translating to larger profit margins when the price speculations are correct. However, if you make wrong predictions, you might end up making very huge losses.
