CFD Trading
‘Contracts for difference’, or just CFDs, are tradable derivative products that follow the prices of global financial markets.
Maximum leverage 1:500
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What is a CFD?
‘Contracts for difference’, or just CFDs, are tradable derivative products that follow the prices of global financial markets. A CFD allows you to obtain direct exposure to an underlying asset, without owning the underlying asset. You will make gains or incur losses as a result of price movements in the underlying asse
Full transparency of overnight interest
At the prevailing interest rate
How Does CFD Trading Work?
CFDs are agreements between two entities, usually a trader and a CFD broker, to trade the difference in the price of an underlying financial instrument from the opening of the contract until it is closed.In terms of profits and losses, while trading CFDs, if the markets follow traders' predictions, their position will be profitable. Conversely, if the market moves against their prediction, the traders experience a loss.Eventually, the traders get these profits or realize the losses when their position is closed after they sell the contracts they initially bought.
What is Leveraged Trading?
Leverage is a concept that enables you to multiply your exposure to a financial instrument without committing the whole capital necessary to own the physical instrument.When trading CFDs, you are engaging in leveraged trading, which means you don’t need to commit the full amount of capital for your trade value. For example, with a leverage of 1:10, your initial margin requirement for this particular CFD is 10%. This means you need to deposit $100 to gain a notional exposure of $1,000. Accordingly, any potential profits or losses will be multiplied. Likewise, a leverage of up to 1:30 means that with $100 you can gain the effect of $3,000 capital. Accordingly, any potential profits or losses will be multiplied.
Managing Risks when Trading CFDs
Some of the ways through which traders can mitigate risk while trading CFDs include using risk management tools like Close at Profit, Stop Loss, Guaranteed Stop, and Trailing Stop.
Close at Profit/Stop Loss:
This risk management tool allows you to decide when to close your position (when it reaches a certain price) to either protect your gains or minimize your losses.
Guaranteed Stop:
By doing this, you are placing an absolute limit on your risk of significant losses. This, in turn, protects you from price swings, even if the instrument’s prices move significantly against your position.
Trailing Stop:
This order secures profits by closing your position automatically if the price changes direction.
To get a better understanding of how risk management tools work, go to our Trading Academy article on Risk Management. In addition to risk management tools, traders may also refer to trading charts in order to understand past prices better. Regardless, it is important to keep in mind that past price patterns do not indicate future results.
CFD trading offers flexibility and the potential for high returns, but it requires a good understanding of the market and risk management practices due to its inherent volatility and leverage effects.
CFD Trading vs Traditional Trading
A CFD (contract for difference) is a trading tool that allows investors to speculate on price movements of a security without owning the underlying asset. The main benefit of CFD trading comes from the price fluctuations of the security itself, rather than ownership of the asset.
Underlying assets can include stocks, indices, commodities, cryptocurrencies, or currencies. CFDs appeal to investors because they can be traded using leverage. This means that investors can open positions with a smaller amount of capital compared to what would be needed to purchase the actual asset.
The primary distinctions between stock trading and CFD trading are leverage and ownership of the asset. When you buy stocks, you acquire shares and become a partial owner of the company, paying the full share price. In contrast, CFD trading does not involve direct ownership of the asset or require physical presence on an exchange.
With reduced capital requirements, beginner traders can access a broader range of financial markets. Platforms like WisunoFX enable investors to trade a wide variety of financial products from the convenience of their home computers.
6 Advantages of CFDs
Trade Long and Short Positions
CFDs allow you to take both long and short positions easily, with no need for contract signing—just press the buy or sell button.
Access to a Wide Range of Markets
Traders have real-time access to a diverse array of markets, including local and international stock CFDs, commodities, and indices.
24/5 Trading
CFD markets are available 24 hours a day, 5 days a week, offering greater accessibility compared to stock exchanges, which operate on limited hours.
No Stamp Duty on CFD Trades
Since you do not physically own the underlying asset, CFD trades are exempt from stamp duty.
Lower Margin Requirements
CFDs require less margin to open a position compared to traditional trades. This means your capital is not tied up in a single transaction, although it’s important to remember that losses can be amplified when trading on margin.
Profit from Rising and Falling Prices
CFDs allow you to profit from both rising and falling markets through short-selling, providing opportunities regardless of market direction.
Note: Tax laws can vary and change; it's recommended to seek independent tax advice before making investment decisions.
Disadvantages of CFDs
Potential for Large Losses
Trading CFDs on margin can lead to significant profits, but it also exposes you to large losses due to the leveraged nature of these instruments.
Risk of Losing All Deposited Funds
Without stop-loss measures, you could lose your entire deposit, including any realized profits.
Not Suitable for Capital Protection or Stability
CFDs are generally short-term and volatile, making them unsuitable for investors seeking capital protection or stable returns.
Unsuitable for Risk-Averse Investors
The volatility and rapid price movements of CFDs make them inappropriate for those who are risk-averse.
Imperfect Hedging
When used for hedging, CFDs may not perfectly match spot market prices due to futures pricing, potentially resulting in losses.
Inappropriate for Predictable Returns
Due to leverage and market volatility, CFDs do not offer regular or predictable returns, making them unsuitable for investors seeking stable outcomes.
CFD Broker Overview
Contracts for Difference (CFDs) provide a means for a broad range of traders to invest in various asset classes without needing to acquire physical products. As new CFD products are introduced regularly, an intermediary is required to facilitate these trades. Unlike traditional markets with a central exchange, CFD trading relies on brokers to execute transactions. CFD brokers offer a wide selection of financial products for investors to choose from.
Despite the advantages of CFDs for short-term trading and hedging, selecting the right CFD broker can be challenging for new investors. With numerous brokers offering competitive services, choosing the best one necessitates careful research.
To attract clients, brokers often develop service packages and features tailored to their target audience. Some brokers focus on services for institutional investors, while others cater to retail traders. The most successful brokers offer customized benefits for a diverse client base, including proprietary platforms that accommodate various investor needs. Brokers typically earn revenue by charging fees to traders.
As a forex trader, you might encounter the following fees from a forex CFD broker:
Fixed Spread
The spread remains constant, so traders know the exact amount they will pay before executing a trade.
Floating Spread
The spread varies based on market volatility and trading hours.
Commission Fees
Commissions may apply to trades or withdrawals, typically calculated as a percentage of the spread.
When trading CFDs, you are speculating on the price difference between the opening and closing of a contract. To protect your investments, it is crucial to choose a regulated broker. Regulators assess the competitiveness and security standards of brokers within their jurisdictions. Prominent regulators include ASIC, ESMA, BVIFSA, IFSC, FCA, FSA, and CIMA. For a blend of security and competitive conditions, regulators like CySEC are highly recommended.
CFD Trading Platform
A CFD trading platform is a software solution provided by brokers and financial institutions that enables remote digital trading. It allows investors to buy or sell CFDs without the need to physically visit an exchange or communicate directly with a broker, as long as they have access to a computer or compatible mobile device.
Basic trading platforms often come as downloadable apps for Android or iOS, suitable for beginners to familiarize themselves with market operations. More advanced platforms, which can be installed on computers, offer a range of customizable tools for experienced traders.
These platforms are typically free once you open an account with a broker. Many also offer demo versions, allowing you to test the platform with virtual funds before making a real deposit.
Key Considerations for CFD Trading Platforms
1. Functionality
Trading platforms provide an interface to monitor real-time prices and make trading decisions. This includes charts, news feeds, and research notifications to support informed trading and portfolio management.
2. Comprehensive Tracking
They are designed to help traders track portfolios, access charts, and stay updated with news and research, all in one place.
3. Variety of Instruments
Platforms offer access to a wide range of tradable instruments, and brokers often provide variations tailored to different client needs.
Choosing the Right Platform: Key Considerations
When selecting the ideal CFD trading platform for your needs, ensure it meets the following criteria:
1. Reasonable Fees
Trading platforms often incur operating costs, which they pass on to traders in the form of withdrawal fees, commissions, and spreads. Opt for brokers with low commission rates. WisunoFX, for example, offers highly competitive spreads, allowing you to trade at minimal cost and without extra charges beyond the Bid-Ask spread. WisunoFX also eliminates bank fees, enhancing your trading profitability.
2. Variety of Trade Instruments
Some platforms offer a broad range of CFD pairs, while others provide only a few options. WisunoFX provides a diverse selection of CFD instruments, enabling effective portfolio diversification without owning the underlying assets. This variety allows traders to access different markets and asset classes, manage risk better, and potentially increase returns. WisunoFX also offers exposure to exotic markets like Thailand, Korea, Japan, and Indonesia, enhancing risk management and portfolio diversification.
3. User-Friendliness
Choose a platform that is easy to use for both beginners and experienced traders. WisunoFX offers tools like entry/exit signals, global market news coverage, and long-term pivot level forecasts, all designed to help traders make informed decisions. Additionally, the platform provides timely analyst tips and price indicators to guide trading strategies.
4. Broker Reputation
Ensure the platform is reputable by checking reviews and rankings, and verify that it is licensed and regulated. WisunoFX is well-regarded and regulated in various jurisdictions, including the UK, Cyprus, and Mauritius. The company has received numerous awards for its excellence, demonstrating its commitment to high-quality services and client trust.
5. Demo Trading
Utilize demo trading features to practice with virtual funds and become familiar with the platform before committing real money. WisunoFX’s MT4 demo account allows you to experiment with trading strategies risk-free and is available on desktop, tablet, and mobile devices.
6. Customer Support
Reliable customer support is crucial for resolving technical issues. WisunoFX offers 24/5 support with many languages, recognized by international awards for its responsiveness and quality. The support team is available to assist with account setup, platform navigation, and other queries.
FREQUENTLY ASKED QUESTIONS
CFD (Contract for Difference) trading allows traders to speculate on the price movements of various financial instruments without owning the underlying assets. It enables profit generation from both rising and falling markets.
In CFD trading, you enter into a contract with a broker to exchange the difference in the price of an asset between the time you open and close the position. If the price moves in your favor, you make a profit; if it moves against you, you incur a loss.
Leverage allows traders to open positions larger than their capital. For example, a leverage ratio of 1:100 means you can control a $10,000 position with only $100 of your own money. Leverage amplifies both potential profits and risks.
The spread is the difference between the buying price (ask price) and the selling price (bid price) of a CFD. It represents the broker’s fee for executing the trade. Traders must account for the spread when calculating potential profits or losses.
Yes, WisunoFx allows traders to use stop-loss orders to manage risk. A stop-loss order automatically closes your position if the market moves against you, limiting your losses.
Margin is the amount of capital required to open a CFD position. It is a percentage of the total trade size, allowing you to trade on leverage. The margin requirement depends on the leverage ratio and the asset being traded.
Overnight fees, also known as swap fees, are charged when you hold a CFD position overnight. The fee is either added to or subtracted from your account depending on the interest rate differential between the currencies or assets involved.
Yes, CFD trading allows you to short-sell assets, enabling you to profit from falling prices. When short-selling, you open a position by selling an asset you don’t own, with the expectation that its price will decrease.
The minimum capital required depends on the account type and the margin requirements for the specific CFDs you wish to trade. WisunoFx provides options for both small-scale and large-scale traders.
Yes, WisunoFx offers a demo account that allows you to practice CFD trading with virtual funds. This is an excellent way to familiarize yourself with the platform, tools, and strategies without risking real money.
You can trade CFDs using the MetaTrader 4 (MT4) platform, which is available in desktop, web, and mobile versions. MT4 offers advanced charting tools, technical indicators, and automated trading options for CFD trading.
The leverage offered by WisunoFx depends on the asset being traded. For example, forex pairs might offer higher leverage than commodities or indices. Traders can adjust their leverage within the platform based on their risk tolerance.
WisunoFx is transparent about its fee structure. The main costs involved in CFD trading include spreads, overnight swap fees (if applicable), and any possible withdrawal fees. There are no hidden charges.
CFD trading can be suitable for beginners, but it carries risks, especially when trading with leverage. Beginners are encouraged to start with a demo account to practice, learn the platform, and understand the market dynamics before trading with real money.
The main difference is that with CFDs, you don’t own the underlying asset. Instead, you are speculating on price movements. CFDs also allow for leveraged trading and the ability to profit from both rising and falling markets, unlike traditional investing, where you usually profit only from rising prices.
Yes, CFDs can be used as a hedging tool. For example, if you own physical shares and expect a short-term drop in their value, you can short-sell the same shares through CFDs to offset potential losses in your portfolio.
To start trading CFDs with WisunoFx, you need to open a live trading account, deposit funds, and choose the markets you want to trade. You can also use a demo account to practice and test strategies before going live.
WisunoFX provides various educational resources, including webinars, tutorials, and guides on CFD trading strategies, risk management, and market analysis to help traders improve their skills and knowledge.
