24. May 2024

CFD simply explained! Successful trading with CFD

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It’s all about explaining to non-financial professionals what CFD is about and what advantages or disadvantages CFD trading offers.

Let’s start with how we look at the spelled out spelling: Contracts for Difference (CFD). This means so-called difference transactions. It basically concludes a contract with a counterparty on the difference of a course. Specifically, you do not buy a stock directly, but you agree on a value with your broker, and if the stock price rises above that value, the broker pays the difference, and if the stock price falls below that value, you have to go to the broker pay the difference. But the reverse variant is possible. Thus, it is possible to achieve profits even with falling prices.

CFDs are speculative financial instruments and belong to the category of derivatives, ie simply that their value derives from the performance of the underlying assets of equities, commodities, crypto currencies, currencies, etc.

Why are CFD’s so popular?

The main reason why CFD trading is so popular and many make a lot of money with it is the so-called leverage effect. You can spend a lot more money than you actually have. This is done so that you put a small part and the rest of the money comes from your broker. It should be mentioned at this point that, as with all investments, this can lead to a total loss.

An example:

The money you use for a trade is called “margin”. You buy a stock for 100 €, this 100 € should be 1% “margin”. That means now that 100 € is 1%, the rest (99%) “lend” your broker. Thus, you are actually putting € 10,000 on the stock. So you have here a 100er lever.

It is also possible, of course, a 5% margin and thus a lever 20.

Here one can really speak of the fact that it is actually possible to multiply his initial investment. But pay attention to every investment, no matter in which asset class, to invest the money, which in the worst case you are willing to lose.

Okey, so you can borrow money from the broker and multiply your investment, and now? Well, with a little skill, it is indeed possible to take very high profits with only a minimal increase in the stock price. Take care for such an investment, because CFD Trading has already made quite a few people rich, but in some also led to a total loss.

Tip: If you want to have a better chance of success, then, for example, learn about trading. So you can analyze crypto currencies, stocks etc. yourself and not invest blindly.

>> Top 5 trading indicators to read <<

Minimal price gains big impact: the power of leverage 

Let’s say you want to put $ 500 on a stock, and your broker grants you the 5% margin. That means your € 500 is 5%, and the rest is “lent” to you by the broker. So you put, so to speak whole 10,000 € on a share and not more 500 € (20’s lever). This means that you have a stock value of $ 10,000, even though you only spent $ 500. For example, if this stock now rises 5%, the value goes up to 10,500 €. And now? You just get the difference! Namely, 500 € (10,500 – 10,000)! Actually, you’re only investing $ 500, the stock just increases by 5%, but you have a $ 500 profit, doubling your investment and now totaling $ 1000. You have made 100% of this even though the stock has “only” risen by 5%.

That’s the power of the lever.

Note: Please remember, however, that the opposite result is possible. An investment can also lead to loss.

Observe risks and invest cleverly

In order to invest smart, one should try to minimize risks and maximize profits. For this reason, the recommendation to recourse to recognized CFD brokers. Above all, there are two that currently dominate the market: Plus500* and Etoro*. Who does not know the constant advertising presence of the brokers, for example on Youtube? These brokers are not only known, but are on the market for a relatively long time and have the highest security measures to trade CFDs on cryptocurrencies, stocks, commodities etc.

Short comparison of the two brokers:

Between 74% and 89% of retail accounts lose money trading CFD. You should consider whether you understand how CFD works and whether you can manage to take the risk of losing your money.

It is actually possible to make big profits with CFD trading. However, CFD trading also carries a high risk. As already mentioned, a total loss of your invested capital is possible. By the end of 2017 it was even possible to get into debt with the broker, this is no longer the case. You can only lose what you invest. Your position will then be closed. For example, if you are working with leverage (20s lever from previous example) and the stock does not rise as expected in our example, but drops by 5% then you lose 500 €, your position will be closed by the broker and you would be at 0 €.

Again the note: CFD trading can lead to a total loss, make your investment wisely and inform you beforehand.

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