Investment Basics

Trading equities over the years has become much easier thanks to the introduction of online trading platforms and other trading instruments. Earlier, you could trade equities only by speaking to your broker over phone or you had to be physically present at the stock exchange. Many trading instruments like CFD trading or contracts for difference, futures trading, financial spread betting and so on were not fully evolved and you had to rest content with just playing the cash market.

The CFD trading instrument however has revolutionized trading volumes in most markets. We are aware that CFDs basically mean an agreement that enables you to take advantage of the difference in the price you took a position and the exit price of whichever underlying you traded in. The main advantage is the access CFD trading provides to a larger quantity of shares by just paying a percentage or margin money. If you had to trade the same quantity of shares in the cash market, you would have to fork out the full sum and that may not be possible for everybody to manage.

CFD trading is different from trading equities in the sense that though the CFD is linked directly to the movement of the underlying instrument, since you are not physically taking delivery or selling physical stock of the underlying like you would in actual cash transactions, the transaction would just follow the movement of the underlying instrument. That explains why you only have to part with a margin that is only about 10 - 15% of the actual cost of the quantity of shares you are actually trading. This allows you to trade up to 15-20 times your capital and if the movement of the market or stock is as per your position, then you can make handsome profits on the margin. You can also lose the same way and CFD trading is therefore a double edged sword.

CFDs unlike options or futures do not expire or have a date wherein the contract needs to be renewed. In fact a CFD contract gets renewed daily if you choose to carry forward your position and you can do that only if you have enough margins in your CFD trading account. Your account will either get debited or credited depending on the way the market has moved for that day as related to the position taken by you.

The advantage with CFD trading is that you can go long as well as short. This allows you to make money from the rise and the decline of the market movements.

There is always risk involved when trading, we recommend you read the CFD Guide and find out helpful information and facts on CFD trading. Topics include discussions on CFD companies and much more.