3 Reasons You Should Trade CFDs
CFDs are one of the financial worlds secret weapons.
Ask any man on the street if he knows what they are, and I guarantee you he’ll stare at you blankly.
But those in the know are fully aware of how powerful they can be.
CFDs have the power to magnify your gains, without you having to put down a large amount of cash.
Simply put, they have the ability to take your trading and your profits to the next level!
And that’s why I want to show you why you need to be trading CFDs today!
What CFDs are And how They Work
CFD stands for Contract For Difference.
The difference between where the trade is entered and exited is the contract for difference.
A CFD is a tradable instrument that mirrors the asset underlying it. It allows for profits or losses to take place when the underlying asset moves in relation to the position taken.
But the underlying asset is never owned!
Basically, a CFD is a contract between you and a broker.
It’s a contract between a “buyer” and a “seller” stipulating that the seller will pay the buyer the difference between the current value of an asset and its value at contract time.
3 Reasons Why You Should Trade CFDs today!
Reason #1: Leverage
You can multiply your buying power by 10 times!
This is perhaps the best reason to trade CFDs.
You can trade CFDs for a mere fraction of buying a share, and you can leverage your profits enormously.
Depending on your gearing, your profit margin on your trade could be magnified by up to 10 times.
You need to heed this warning!
The same can happen in the reverse direction, IE your losses can be magnified as well.
High leverage can magnify losses when they occur, and you can end up having to pay in based on your magnified loss.
Reason #2: Easy To Manage
CFDs allow you to manage your account easily.
This means you don’t have to worry about any pesky expiry dates and you save yourself the costs of rolling over your contracts into the next quarter.
Reason #3: Profit No Matter What The Market Does
CFDs give you the ability to take advantage of when the market swings in both directions.
Going long (or buying) is easy enough to understand.
Think of the old adage “Buy low sell high”, that applies here (and to most financial instruments).
But the beauty of CFDs are taking advantage of when a market dips.
In this instant you’d go short (sell).
Going short means the reverse process of buying low and selling high.
In a bear market you can make money by selling high and buying low.
The Inner Workings of a CFD Trade
Here’s an example of a CFD trade:
Let’s say you want to buy ABC shares that’re trading at R400 per share in the market.
If 100 ABC shares were bought at R400 the cost to the investor would be
100 x R400 = R40,000
With CFD’s you’re only required to put down a margin to hold the position determined by the CFD provider.
The Margin requirement on ABC is 10%
Thus R40,000 x 10% = R4,000 margin to hold 100 ABC’s
Now say the share price moves to R420 per share and you sell you making a profit of R20 per share.
R20 x 100 shares = R2,000 profit.
(R2,000 / R40,000) x 100 = 5% profit if you purchased this as normal equity (and you would’ve had to place down the full amount!).
But you were only required to place a margin of R4,000 meaning:
(R2,000 / R4,000) x 100 = 50% profit was made on initial margin.
Using the same example say ABC share price moves down from R400 to R390 where you sell your position:
This means you would rack up a loss of R10 per share.
R10 x 100 shares = R1,000 loss
As you’re trading CFDs the loss on margin that you placed on the CFD would be:
(R1,000 / R4,000) x 100 = 25%
CFD’s leverage your position, and increases your potential reward as well as your risk.
This is something you NEED to keep in mind when you trade CFDs – Just as much as they can magnify your gains, they can magnify your losses!
Where To Trade CFDs
CFDs are powerful weapons in your financial arsenal.
They allow you to take advantage of smaller market movements in order to make money over the short term.
But they’re not for the faint hearted, and you need to use them correctly.
Just about every broker I know offers them, and all you need to do is ask yours if they do.
If they don’t there are plenty of decent brokers who do.
Standard Bank is a good place to start, as are IG Markets or GT247.
PS: If you're looking for the unfair CFD advantage, and you want to make money trading CFDs, you simply have to check out this report.
In it, we detail the 21 deadly CFD trading mistakes you just cannot afford to make if you want to be a profitable CFD trader.
It's taken us years to learn this stuff, and that's why we want to give this report to you, so you don't lose money from any of these deadly mistakes!