With CFD trading, you can trade the price movements of financial instruments, such as currency, shares, stocks, and other commodities without purchasing the product itself. A Contract for Difference (CFD) acts as a security or agreement that allows two different parties (buyer & seller) to exchange the difference of price between the opening and closing time of a contract. With such agreements, the two parties settle the final contract by the mean of cash money rather than physical securities, making the settlement much easier.
CFDs work as derivative financial instruments that mirror the movements of the underlying assets, such as a stock or index. Since it is a derivative, you do not actually possess the underlying asset, you just use it for speculating on the price movements. In order to trade a CFD, you need to have a CFD trading account on any of the available CFD trading platforms. This account works in the same way as other trading account do. With CFDs, you can diversify your portfolio as they allow you to trade a large range of financial markets with just one CFD trading account.
Getting started with CFD trading is relatively easy but it does involve a risk too. Traders especially those who are completely new to this venture, should take adequate time to research the market as well the potential benefits and drawbacks that they will inevitably be experiencing once real investment is committed to the market. There are a number of CFD providers offering a wide assortment of options that can be tailored to your specific needs. You can choose between a demo and regular CFD trading account to start with your venture though a demo account is strongly recommended for beginners.
How a CFD trading Account Works
CFD trading accounts work like any other trading accounts. In order to trade CFDs, you need to make a small deposit (initial margin or collateral) into your CFD trading account and take a position. There are mainly two types of CFD trade positions: long position and short position. With a long position, you can gain profits when the price of underlying asset rises while a short position will benefit you when the price of underlying asset goes down.
Most of CFD trading platforms offer you the trading accounts with some or all of the following points.
- You have to make a small deposit (as collateral or initial margin) into your CFD trading account
- You can purchase to open a long position or sell to initiate a short position.
- You will be experiencing profits and losses in a real-time scenario as the CFD market moves.
Both demo and live accounts can be applied with available CFD trading platforms. This needs you to provide the platform with your identity information, source of income, level of experience with such trading. Your information is kept secured and private so you can continue trading with great peace of mind.
Benefits of Demo CFD Trading Accounts
CFD trading provides traders with the opportunity to start with a demo CFD trading account so that they can have enough exposure to the ups and downs of a CFD market. Other main benefits of these accounts can be described as below:
- Risk & Obligation Free – A demo CFD trading account is risk and obligation free. It allows you to test the environment and get familiar with the trading procedure using virtual funds on the CFD trading platform. A demo account is designed to stimulate live CFD trading conditions which do not involve or cause any risk to real money. There are many online trading platforms that offer traders and investors excellent trading features and advanced tools including a demo CFD trading account facility where you can practice trading without using real money and speculate on the price movements of a specific asset.
- Best for Beginners – As the matter of fact, demo CFD trading accounts are meant to help those unskilled or inexperienced traders understand how trading CFDs work. This not only eases the learning process but also encourages new investors to show more willingness to learn about the basics before they can venture their investment. If you are a newbie to CFD trading, sign in with a reputable CFD trading platform to avail such an amazing facility. Once you have tested all of your strategies and are ready to risk your real money, you can upgrade for a paid CFD trading account and avail all the tools for a reasonable price.
- Familiarity with a New Environment – A free demo CFD trading account allows you to try out new trading platforms in a risk-free environment and gives you the opportunity to practice CFD trading strategies and methods. Luckily, there are many CFD platforms who allow you to keep your demo account activated as long as you want. This feature is particularly useful to test new trading techniques and strategies even after you have opened a live regular CFD trading account.
- Easy to open and use – Opening a demo account requires you to use a valid email address, your contact details, such as your name and phone number, and a strong password. Once you have signed in for a demo CFD account, a verification link is sent to your given email address in order for you to activate it. Once activated, you can use the ‘Payments’ menu to add virtual funds and start practicing CFD trading.
The Bottom Line
With CFD trading, traders can obtain all the advantages associated with having a financial product, such as a share or stock, without actually possessing that product. You can harness CFDs to avail both short and long position and speculate on the underlying product’s future price movements. Alternatively, you can also make use of these contracts to hedge your portfolio and manage various kinds of risks, including the downside risk. If you are considering CFD trading, it is recommended to understand the basics of the market and practice it using a demo CFD trading account so you are ready to open and fund a regular account and risk real-time money for the same.