The similarity between traditional trading and CFD trading is that they make money on moving share prices and other investment instruments. In both cases you need to have some knowledge of the market scenario around you to make sound judgment and split second decisions.
What Is A CFD?
A Contract for Difference is an agreement according to which you are not dealing in actual physical instrument but only on the movement of the value of the instrument. You are trading on the difference in its buying and selling price.
For example, the value of a particular stock is $ 5. You buy 100 CFD's of that stock. When the value of that stock goes up and your share CFD's is $ 5.50 each, you sell the stock. You earn a profit of $ 0.50 x 100 this way. Thus, $ 50 is your profit.
Other Factors Involved
This is simply the basic nature of the trading that takes place. There are a number of other points that affect the profit percentage. First, there will be commission charged that will be taken out of the profit. This will be part of the costs that you incur on buying the contracts for difference in the first place.
Next, you need to put up some amount of margin money upfront for deposit. This amount is variable and changes depending on the broker, the client or volume of the trade.
It is not necessary that the value will increase on the CFD of the stock that you have bought. You need to have enough money in your account to handle such issues.
What You Can Do To Minimize Risks
CFD Trading is not for someone who buys stock and hopes about it till the time it moves up or down. This is a very volatile and fluctuating market. You need to keep a close eye on the prices so that you can make informed decisions and buy or sell accordingly.
If you understand market scenarios and have an idea of stock trends you can make sound judgments and profit in a very short time.
You also have the option of a stop-loss. To minimize the risk you can put in a stop at the trading when the value comes down to a certain point. If it continues to fall then you have saved your position by stopping at that particular value where you can take the risk.
Appeal Of CFD Trading
Since you are not dealing with actual shares but only derivatives you can take advantage of fluctuating price movements. If you have the habit of watching the market trends and speculating successfully the future of that stock then CFD trading is the best for you. You can make a tidy profit without having to buy the shares in the first place. But your account should also have enough to handle the risk if it goes the other way.
Since CFD trading does not happen in the markets, you can take your time, learn the market trend and the latest news and inform your broker even when the markets are closed. With the benefit of online trading at your fingertips you can do this from home itself.