When you read investment articles, you may come across the term Contract For Difference (CFD).
CFD has long been a taboo word to retail investors because people do not understand it will tell you it is speculative and dangerous. Yet, it is the same people who ask you to buy stocks as if stocks have no risk.
The idea of CFD is simple: you enter into a contract with one of the CFD providers such as XTrade. The contract is “derived” from a range of underlying assets, e.g. stocks, commodities and currencies. Based on the price movements of the underlying assets, either you or the CFD provider will make a profit.
CFD is a financial instrument for you to invest without owning the underlying assets. It is growing continuously in popularity due to its many advantages. For example:
- You are able to trade on both the rising or falling markets
- You can invest in an asset which is not easily accessible
- You can trade with a small capital outlay using margins with almost all the CFD providers.
However, if you are a beginner, you should start with this article and I will discuss some of the important things you need to understand before you embark on your CFD investing journey.
#1 Always preserve your capital
Preserving your hard earned money is the first thing you must bear in mind before you go to learn any CFD trading strategies.
It may be counter intuitive, but since either you OR the CFD providers will take a profit in any contract, the other party must lose. As a beginner, you should just forget about making money. Your job is to keep all the dollars in your own pocket as long as possible.
#2 Control your leverage in CFD investing
Leverage is powerful and it can bring a big profit for the small investment capital you have. But on the other hand, it can bring a big loss too.
If things do not go well and you are not careful, you may lose all your hard earned money in just a few trades. As a beginner, you want to keep the leverage as low as possible and never expose all your deposits in risk with excessive leverage. Using leverage wisely is one big quality of smart CFD traders and you should try to learn from them.
#3 Use CFD stop losses religiously
When it comes to cut loss, it is always easier said than done.
Luckily, most CFD providers allow you to preset a stop loss point in their system. Before you start trading, go through the online academies by the providers and get familiar with their system.
Defining stop loss is important and sticking to it is more important. Most of the time, set it and forget it is the best mindset you could have.
Keep a positive mindset
As a beginner it is very important that you keep your mind positive.
Nobody wants to lose money, but sometimes you will face some unwanted frequent failures. Rome was not built in a day and this saying is perfectly right in CFD trading.
You can’t be successful all the time right from the beginning. You need to have patience and discipline in CFD trading and keep on a positive mindset in CFD trading.
If you have any question about using CFD as an investment instrument. Leave your comment below and I will answer them all.