How To Trade CFDs?

How To Trade CFDs?

The “Contract for Difference” (CFD) represents a special financial instrument derived from an asset, that gives the trader an opportunity to profit from changes in the prices, while not owning the underlying asset itself. CFD trading can apply to various products, such as currency pairs, indices, commodities, single stocks and cryptocurrencies

Why were CFDs created? 

CFDs were initially used by hedge fund managers and institutional traders as they provided a cost-effective hedge when trading stocks on the stock exchange.
 
The main benefit derived from the CFD trading format is it requires only a small margin for trade. No physical shares change hands which also means no stamp duty is required on CFD trade deals.

What is CFD stock trading?

CFD stocks trading entails trading on stock prices of publicly traded companies. Some of the popular stocks you might’ve heard of are Tesla (TSLA), Apple (AAPL), Alibaba (BABA), Amazon (AMZN), Microsoft (MSFT), etc. Those are just some of the most popular companies that are publicly traded, but you can find many more that you could trade with and potentially profit from the price movements of their stocks.
 
Whenever you buy a stock price, someone is selling that stock price to you. Likewise, when you’re looking to sell your stock price, someone else will be buying it from you. The market is huge and many people are interested in buying or selling any given stock price at any time. 
 
The price of the stock depends on many factors and one of the most important ones is the number of buyers and sellers in the market. If more people are interested in buying the stock compared to the number of people wanting to sell it, the stock price will go up as the demand is higher. If people are more interested in selling the stock that will push the price downwards.

How to trade CFDs with Limit Prime

Here are the basic steps on how to enter a CFD trade and how to close it:
  1. Click Open a real account.
  2. Complete registration.
  3. Deposit the amount of money you would like to trade with.
  4. Choose a financial instrument you will trade with. 
    When you log in to your account on the platform, you will see a number of financial instruments you can trade with. For now, choose just one of them (eg. EUR/ USD).
  5. Choose to buy or sell. 
    After you analyse the market, you can decide whether to buy or sell this asset. If you think a price will rise, you should buy, and vice versa - if you think a price will decrease, you should sell.
  6. Enter a trade size. 
    This is where you choose a lot size for your trade. 1 CFD is the equivalent of 1 physical share in equity trades.
  7. Manage your risk.
    Choosing to set a “pending order” will protect you from going deep in losses, and will close your trading position at a certain price.
  8. Monitor your position.
    When you are just starting out, we advise you to monitor your position. Even if you set any “pending orders” or “take profit orders”, monitoring will help you to see your real-time profit/ loss. You can track market prices, see your profit/ loss update in real time and add new trades or close existing trades.
  9. Close the position.
    In case your position is not automatically closed because you didn’t set any pending order or take-profit order, you can close your position whenever you are ready. 

Example of CFDs trading

To be easier to understand how it all works, watch the video below.
 

Conclusion

With CFD trading, you don’t buy or sell an asset itself - you don’t possess it physically. 
 
The number one benefit of trading with CFDs is that you only need to deposit a small percentage (margin amount) of the full value of the trade, in order to open a position with a broker. 

Trading CFDs includes leverage. Leverage is a means to help you profit more but can make you lose more, sometimes even more than your initial deposit (depending on the broker - you may or may not be protected from negative balance).
 
Check out our example above which can help you understand the CFDs trading process, and how you can benefit from it, or click here to learn more.



Sources Consulted 

1. What are CFDs? 17 Mar 2021 [cited 23 Mar 2021]. Available: https://www.cmcmarkets.com/en/learn-cfd-trading/what-are-cfds
2. CFD Examples. 17 Mar 2021 [cited 23 Mar 2021]. Available: https://www.cmcmarkets.com/en/learn-cfd-trading/cfd-examples
3. What is CFD trading and how does it work? [cited 23 Mar 2021]. Available: https://www.ig.com/en/cfd-trading/what-is-cfd-trading-how-does-it-work
4. What is a Lot in Forex? BabyPips.com; 4 Dec 2011 [cited 23 Mar 2021]. Available: https://www.babypips.com/learn/forex/lots-leverage-and-profit-and-loss
5. Picardo E. Understanding bid-ask spreads when exchanging foreign currency. 29 Aug 2020 [cited 23 Mar 2021]. Available: https://www.investopedia.com/articles/forex/090914/understanding-spread-retail-currency-exchange-rates.asp
6. Lee M. What is a pip? 15 Oct 2020 [cited 23 Mar 2021]. Available: https://www.investopedia.com/ask/answers/06/pipexplained.asp
 

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