Explaining CFDs, part 3

So, we have so far been explaining what Contracts for difference (CFDs) are, their origins and their sudden popularity. Now, we will go into further details into just how CFDs function. Specifically, we will be looking at how one can trade on margin with them.

Trading on margin

As we have mentioned before, you can use any underlying asset for a CFD. You also do not every own said asset or have a set date to trade on. You only trade when you feel comfortable. These are just some of the reasons that CFDs are so attractive to traders. The final reason is the margin or leverage that you can usually have. Brokers trading in CFDs always offer these. What are they though?

The margin you pay on a trade is only relevant for loans on a trade. It is the amount of money you have to put down relative to the loan you want. Therefore, you can greatly increase your earnings potential. All you have to pay back the broker is the loan with some interest. The actual profit off of a trade is all yours.

For CFDs, the margin is at around 1 to 20%, and the rest would be the loan. So, you can get very large loans for quite small amounts of money.

There is a negative to this, though. A loss in such situations can be much larger than with normal trading. If your trade does not go in the direction you wanted to, you may have to pay a margin call. This is an extra expense so that the broker does not worry too much about the trade. Therefore, there is definitely an element of risk when you are trading on margin.

This is compensated for with the non-fixed date, so you can always recover from a bad dip. As long as you know that you are sure that you will do well, this can still be a great option.