Although CFD are a relatively new way to trade within the stock market and other financial markets, it is a rapidly growing area of the investment markets. Seasoned traders are dabbling with this technique and it has opened the door for many novice traders to invest in the markets. However, it is essential to understand the processes and risks associated with this type of trading.
CFD became a legal trading vessel in 2008 when the United States recognized it as a valid, although different way to trade on the stock exchange. It is recognised as one of the easiest ways for anyone to start trading; particularly those with no experience.
When you trade in CFD you never own a commodity or asset. Instead you are speculating on whether the price of a specific asset; usually defined by the share price, will go up or down within a set period of time. In effect, you are gambling or making a prediction on the price movement of a particular asset; of you get it right you make money, if not, you lose money. Each speculation is usually very short term.
There is a good quantity of information provided to you before the trade, whether you use online software or an approved CFD broker. In essence you choose an asset and decide whether the price will go up or down; you cannot hedge your bets and hope it will stay the same! This makes the concept of your investment very simple; either the price moves in the direction you say it will; you will get a return on your investment, or, it moves the opposite way and you get nothing.
Once you have chosen your asset then your CFD broker will tell you the percentage return you will get if you are correct. You then need to choose the timeframe for your speculation and how much funds you are willing to commit. Once you have decided all these factors and you are happy with your decision, start the trade by selecting "execute" on your screen. The sit back and wait!
CFD trading is one of the few areas of investment where you will know exactly what your return will be; providing the stock price moves in the right direction. You are also open to trading in a huge variety of markets; whether currency, stocks or commodities; the principle is the same across all markets. In fact, CFD are one of the easiest ways to trade on the international markets without needing multiple brokerage accounts and complicating your investments.
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