Invevstor using mobile trader app. Stock market, investment concept

How CFD Trading Works

COVID-19 has shattered conventional systems of employment. In Nigeria and South Africa, millions are turning to remote methods of earning. Unsurprisingly, online trading is all the rage. Today, when movement is restricted, consumers have an opportunity to gain profit without leaving their homes. CFD trading is on the rise, along with currency exchange and other instruments.

Anyone can learn to trade through the Internet. Now, when global brokerage brands offer services on the continent, opportunities are broad. Contracts for Difference allow holders to benefit from price trends without owning any physical assets. Here are the fundamentals of the instrument.

Forget About Old-School Stocks

CFDs are entirely virtual in nature. Yet, they bring real profits to those who can analyze the market and foresee its development. Unlike physical shares, CFDs require no stock exchange. As all operations are conducted remotely, convenience is undeniable.

Traditional shares are bought and sold on physical exchanges like NYSE. There, participants buy and sell shares issued by large corporations like Tesla or Microsoft. Companies offer their stock to attract investor capital. Investors, on the other hand, are entitled to regular dividends. Through shares, they buy ownership of a percentage of the company. Shares may be bought and sold freely, which means you can also benefit from changes in their value.

CFDs are more accessible as they are bought and sold through the Internet. All you need is a registered account, the right software, and a deposit. Reputable brokers like Alpari provide clients with support and guidance at every step of the way. Moreover, as trading platforms have mobile versions, market analysis and trading can be done on the go.

Thus, even though CFDs do not exist on paper, they can bring tangible profit. Trading terminals like MetaTrader 5 are designed to accommodate CFD trades. Users have access to relevant market data and can make informed decisions for better results.

Basics of CFDs

Basically, a Contract for Difference is an agreement between a broker and their client. Its subject is the price of the underlying community. In essence, owners of CFDs make a profit from appreciation or depreciation of their underlying asset, but only indirectly.

For instance, if your CFD is linked to crude oil, you will not be buying any physical barrels. The price of your instrument will rise or fall in line with the price of crude oil. This is the source of potential profit. Learn more about CFD trading Nigeria and discover that the principles are similar to the trading of currencies, stocks, and other assets.

The goal of a trader is to buy or sell their CFDs for profit. Both short and long positions may be opened. For example, if you expect your instrument to gain value, you can purchase more lots now and reap profits in the future. On the other hand, if a fall is predicted, traders sell their CFDs before they lose value. Following the plunge, they can buy back more lots for less.

Advantages of CFDs

With CFDs, you do not have to own any physical assets. Just open a live account, deposit funds, and start trading. Moreover, the broker can increase your buying power through leverage. This means you can open positions using a portion of the company’s funds. As a result, small changes in price can bring sizable gains. However, it is important to remember that higher losses are also possible.

Types of Underlying Assets

Aside from crude oil, CFDs may be tied to many other commodities and assets. Whatever the basis, the logic of trading holds. Today, global brokerage firms offer CFDs on:

  • commodities (e.g., wheat, precious metals, oil, etc);
  • market indices (e.g., FTSE100);
  • stocks;
  • cryptocurrencies (Bitcoin, Ethereum, Litecoin, and Ripple).

Thus, traders should choose assets they know best. For example, if you are knowledgeable about the cryptocurrency market, purchasing CFDs on Bitcoin makes sense. Avoid underlying assets whose dynamics are unclear.

Word of Caution

The appeal of CFDs is undeniable. In comparison with physical stocks, futures, or options, they are easier to access. Traders can analyze the market using desktop or mobile terminals. Both short and long positions are accepted. Knowledge of your underlying asset can bring impressive returns.

On the other hand, leverage should be treated with caution. Newbies are advised against it, as potential risks grow along with potential profits. Thus, start small and increase volumes as you gain experience. It is also possible to delegate decisions to an expert. Through copy trading, you can replicate CFD strategies of pros.