CFD trading is an extremely popular financial derivative instrument that enables traders to speculate on potential short-term market movements. As CFD trading is leveraged (meaning that your risk of losses is increased), this type of trading can be very useful for hedging risks and in providing a method of earning a return when the market does not perform according to your expectations.
Some of the advantages of CFD trading south Africa are that you may trade on your margin, and although you may go short or long (buy or sell) when you believe market prices are going down or up, you are only trading on the difference in the difference between what you pay and the market price.
The key advantage of this form of trading is that it offers flexibility. CFD allows you to trade at any time of the day – this is referred to as day trading. This makes it ideal for speculators who are looking to make quick trades for large amounts of money. It also offers the benefit of allowing you to hedge risks associated with any particular asset.
For example, when you are speculating on the price moves of gold, you would do well to trade at the time of a gold price move. If you did this, you would be taking on the additional risk of the price moving up (down), which you would have to compensate for by selling (profiting).
However, CFD should not be used to speculate solely on market price movements. Although you can gain substantial profits through this form of trading, there is a potential risk of substantial losses. CFD trading was created to be used for risk hedging, which means that the trader takes a measure of protective cover against any losses that may occur as a result of speculation.
Of course, there is also the risk that market price movements will be too volatile, and your investment could fall. This is why it is so important to take the time to carefully consider how you intend to use CFD when making your trades.
One way that CFD trading can be used successfully is by traders who wish to gain a higher return from their investment than the price of the 500 shares in which they hold. To do this, you need to leverage the investment to represent more of the value of the asset than the total amount of your holding. Leverage refers to the amount by which the stock or commodity is increased (i.e. multiplied).
The more leverage you have available, the greater the possibility that your loss will be limited to only those profits that are invested in leveraged trading. However, due to the nature of CFD, if you incur large losses, your position within the trade could be closed and your capital drained. If you are particularly cautious and diligent, you may discover that the risk/reward balance is more favorable, allowing you to avoid putting your capital at risk to reap the benefits.
