A beginner’s guide to trading CFDs

 A beginner’s guide to trading CFDs

CFD stands for Contracts for Difference, and CFD trading is a popular form of trading that allows traders to speculate on the price movements of a financial asset. This asset can range from stocks and commodities to currencies and indices. CFD trading has become very popular with investors today due to their flexibility, liquidity, and ability to trade on margin. 

In this article, we will provide an overview of how CFD trading works, some of its benefits, and how to find the right CFD broker for you to work with. Read on to learn more.

How CFD trading works

CFD trading is relatively straightforward. Traders buy a contract going long if they believe the market price of an instrument will rise, and they sell a contract going short if they believe the market price of an instrument will fall. They enter into this contract with a counterparty, which is another trader on the other end of the transaction, and they agree to exchange the difference in the asset price from the time the contract is established to the time it is closed. 

CFDs have no expiry dates, and traders decide when they want to close their positions by entering into another with opposite conditions to balance out the transaction.

An example of CFD trading with commodities

Let’s say that a trader believes the price of gold is going to rise, as the other markets are a shambles and many traders turn to gold as a safe and stable investment. They purchase a CFD contract to buy gold. The current price of gold is $1,000 per ounce, and the trader decides to buy 10 CFDs, with each contract outlining 100 oz of gold.

The price of each CFD is based on the price of gold in the commodity market. If the price of gold rises, the value of the CFD will rise in proportion. Let’s say that the price of gold does indeed rise to $1,050 per ounce, and the trader decides to close their position. The trader would then sell 10 CFDs on gold, and the profit would be $50 x 100 ounces x 5 CFDs = $25,000.

However, if the price of gold falls, the trader would incur a loss based on the same calculation. Let’s say that the price of gold depreciates and falls to $950. In this case, the trader, when selling 10 CFDs on gold, would incur a loss of $25,000. These are quite significant losses, and traders should be careful and not trade with more money than they can afford to lose.

Why trade CFDs?

There are many benefits to trading CFDs, making them popular among traders around the world. Some of them include high liquidity, flexibility, and the ability to trade on margin. Let’s look at these benefits up close.

High flexibility

The best thing about CFDs, according to many traders, is their flexibility. Traders can use a CFD for two purposes: speculation and hedging. They can make predictions on price movements of stocks, commodities, currencies, indices, and other asset classes without having to own the instrument. They can also take both long and short positions on these assets, which means traders can potentially profit from any market situation – when an asset is appreciating and when it is depreciating.


CFDs have high liquidity, which is a great benefit for traders who wish to buy and sell contracts quickly and smoothly. Due to a generally high demand for CFDs, especially contracts that speculate on popular instruments such as blue-chip stocks and major currency pairs, traders have no problem finding a counterparty – a buyer or seller to buy or sell their contract.

Use of leverage

CFD traders can use leverage to control a larger position than they would otherwise be able to with a small amount of capital at the outset. This can result in much higher potential profits, which can be appealing to high-risk traders. However, the use of leverage also comes with the risk of incurring a great potential loss. Therefore, CFD traders should use leverage very carefully, and they should keep in mind that the markets are ultimately unpredictable.

No ownership

Finally, CFDs can be very convenient for many traders as they are contracts that allow them to speculate on assets without needing to own them. This means there is no need to think about physical deliveries, storage, and ownership. Traders can simply speculate on price movements in the markets and make a potential profit based on market movements.

Finding the right CFD broker to work with

The most important thing you can do when you get started on your CFD trading journey is finding the right broker for you. This does not have to be a complicated task – in fact, let us break it down to you some factors that you can consider when making your decision.

Regulation and licensing

The most important thing you should take note of is whether a broker is regulated. In Singapore, the Monetary Authority of Singapore (MAS) is the country’s central bank and chief regulator for institutions that offer financial services, including CFD brokers. Ensure that your broker is regulated by the MAS. A good example is Saxo CFD broker, which is a Danish investment bank that has been operating in Singapore for years and regulated by the MAS. Traders can have greater peace of mind when they work with a regulated broker, as they can be sure that their funds are kept safe and secure.

Trading platform offered

Many brokers offer connections with MT4 or MT5, which are two of the most popular trading platforms in the industry. There are also brokers that offer their proprietary trading platforms. You should ensure the platform is compatible with your trading strategy and preferences. This means making sure you can trade on mobile and desktop, and that they have all the tools and features you will need to customise your trading space. You should also ensure that the trading platform has a good connection with servers so that you can execute your trades with low latency and minimal slippage.

CFDs you can trade

Not all brokers offer CFD trading for their traders, so traders should make sure their broker does. Traders should also check to make sure that the broker offers access to the markets they want to trade CFDs on, such as the right stocks, currency pairs, indices, and commodities. Overall, they should ensure that the broker also offers a wide variety of instruments, so that they can diversify their portfolios with ease and efficiency.

In closing

CFD trading provides many benefits for traders and are quite attractive in the world of investment. They are highly liquid, allow for lucrative increases when done right, and are very flexible. However, they do not come without risk, and traders should be aware of what these risks may be before trading and apply the appropriate risk management strategies. Before trading, all CFD traders should do sufficient research to find the right broker to work with, as well as the right approach to trading. This means doing their due diligence to learn how to trade CFDs, what moves the price of the assets they want to trade, and how much they can afford to lose. 

Issac Schultz