What Are CFD and How Are They Traded?

Everybody’s talking about making money online these days, and they often mention contracts for difference. They say that CFD trading commodities requires no real assets and little to no knowledge about them. Is it true? If it is, then what is CFD – trading or gambling? Let’s see.

What Is CFD?

Contacts for difference (or CFD for short) are a form of derivative contracts. Another form of derivative contracts is binary options, being just as simple as popular online. What they (and other derivatives) have in common is that they don’t operate with actual commodities. They are put beyond the process. When you play on currency, oil, gold, or any other commodity, you don’t have to actually own it, buy it, store it, or be involved in real commodity trading.

Contracts for Difference is an evolved version of futures (or rather equity swaps), but the greatest thing about it is that you don’t have to know it to start. Neither do you have to own the commodity. This is purely a  market tool, and let’s see why.

CFD So Popular Online: Why?

Just like the Internet itself, CFD as a contract type was invented in the early 1990s, in the UK. In short, they work like this:

  •  You sign a contract to buy or sell some asset at some moment in the future for a set price;
  • When that moment comes, you compare the actual price to the one from your contract;
  • If it’s higher than expected, the buyer pays the seller the difference;
  • If it’s lower, the seller pays the buyer.

As you see, it requires no actual asset. If the asset is, for example, gold, you don’t need to have a single piece of gold on your hands (or in your bank cell) to make such deals. You just need a skill to predict whether the price will go up or down.

This requires lots of data, both current and archive. CFD apps and sites can fetch data from various sources in real time to show prices change. With enough storage, there is always a place for some analytic tools that help traders see tendencies and come to conclusions. Tools that have been available to professional brokers in trade centers are now just one tap away. And COVID-19 still urges us to work and earn from home.

Is It Safe to Trade CFD Online?

Like any investment on the finance market, CFD has its share of dangers. As you search for a broker (a website or a mobile app where you can trade), you can run into fraudulent ones. It may provide you with wrong data and signals, manipulate its data so your assumptions turn out wrong, and you lose money. Even if you gain, making the right decision, the hard part may be to withdraw your earnings. It may be delayed for no reason, or your account may simply be deleted.

Another danger may be caused by you. If you are too self-assured, thinking your knowledge is already sufficient (in fact, nobody’s is), you can risk too much, rely on wrong sources and signals, and end up losing your investments. It’s not so bad if you consider it a lesson. But it’s much better to learn and then gain profits.

If the first issue is about finding the right broker (which requires Internet awareness, search and fact checking skills, and a bit of luck), the second is about constant education. There are many materials to study; brokers themselves provide basic courses, demo platforms, signal reading manuals, various FAQ sections, and so on.

It’s up to you whether you want to invest your time as well as money. Along with trading manuals, you need to read the news, check whether they are true, and (even more important) whether they will affect prices. This can help you predict the future and benefit from it.

Spread the News!

This is just a brief introduction to the world of CFD. As you dig a bit deeper, you will up your expertise level, and smile at the word “spread” in this headline. So far it will be great if you bookmark it, or – even better – share it on your Facebook and Twitter. Maybe this will start a discussion with helpful replies. Or if you have one to drop, do it right here in the comments.

 

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.