A CFD (contract for difference) is a contract between two parties on the movement of an asset price. CFD trading permits one to take a position/lot on the price of an instrument without actually owning the underlying asset. CFDs have a number of key features that make them both exciting and unique. One of these key features is that they enable you to profit from both falling and rising markets.
Here are some of the basic things you need to know about trading cfds in Singapore.
Trading CFDs allows you to profit from both rising and falling prices
If you believe that the price of an asset is going to rise, what you need to do is ‘buy’ or go long. This way, you get to profit from every increase in price. On the other hand if you believe that the price of an asset is going to fall, you ‘sell’ or go short. This means you’ll profit everytime the price decreases. However, if the markets doesn’t move in the direction you expect then you’re guaranteed to suffer a loss.
For example, if you believe that the share price for Apple will fall in value what you do is sell or go short on the CFDs. This way your profits will rise in line with any fall in price below your opening level. However, in the event that the share price for Apple rises, you will suffer a loss for every rise in price. Therefore, the amount of profit or loss you make will depend of the size of your lot/position as well as the size of the market price movement.
Markets where you can trade CFDs
The beauty of trading cfds is that it can be done in a plethora of global markets as well as multiple asset classes. In addition to this, you have the ability to utilise leverage and go both short or long. Some of the markets and asset classes include:
- Foreign exchange
Also, you don’t have to access multiple different platforms to trade globally in the different markets. This is because everything is available under one login, anywhere and everywhere you need it. You can trade via your phone, web browser, or your tablet.
There are even some markets where you can trade outside of trading hours if you want to make the most of company announcements. However, keep in mind that the market’s out-of-hours price might differ from the normal opening price.
They are leveraged
CFD trading allows you to gain a much larger market exposure for a relatively small initial deposit. What this means is that the return on your investment trading cfds is significantly larger when compared to other forms of trading. This is because with CFD trading, you only need a small percentage of the total trade value to open the position and maintain the same level of exposure.
However, it is important to remember that while leverage can magnify your profits, the same case applies to your losses. Therefore, if prices move against you, you may find yourself closed out of your position by a margin call and to keep it open you will have to top up your funds. When trading CFDs, it is crucial that you understand how to manage your risk otherwise you will end up suffering major loses.
They are a derivatives product
Trading CFDs means that you don’t actually own the underlying asset. Therefore, you are merely making speculations on whether the asset’s price share will fall or rise. For instance, if you’re trading Apple CFDs it doesn’t mean that you own those shares. What you’re doing however, is simply speculating, and potentially profiting, from the same movements in share price.
CFDs is one of the most popular and flexible ways of trading short term movement in the financial markets of today.This is made possible by ability to go short or long coupled with the fact that CFDs are a leveraged product.