An intro to CFD trading

CFD trading is an exciting way to profit from rising and falling markets. You can trade anything from ordinary shares to commodities with CFDs, and there is often no commission, maximising your potential profits. Here, we will look at how to get started with CFD trading.

Warning: Online CFD trading carries a high level of risk to your capital and can result in losses that exceed your initial deposit. Never invest more than you can afford to lose, and consult with a professional if you are unsure of any risks involved.

What is a CFD?

CFD is an acronym for Contracts For Difference. Unlike traditional stock market investing, you do not own the share but are simply speculating on whether it rises or falls. It is an agreement (contract) between two parties to exchange the difference in the value of a security such as a commodity or treasury bond between the time a contract opened and closed.

For example, if you buy a CFD on a share thats £5.00 and the price rises to £5.50, you profit from the rise in its price. If you bought 1000 CFDs, your profit is £500. CFDs mirror share prices, letting you profit from any movements.

CFD trading offers lots of advantages compared to traditional investing methods.

* You can trade in a wide range of assets. CFDs are available in anything from major currencies to treasury bonds and stock indices.

* No fixed expiry date or contract size. Unlike futures, positions are renewed at the end of each day.

* You pay no stamp duty with CFDs.

* You can work in the evening. CFD trading is ideal if you are working full-time. You can place orders for a position the night before and adjust any stop-loss positions if you need to.

* You can profit from falling shares or markets by using a sell order to go short.

* Stop losses can be set automatically, helping minimise potential losses.

* CFDs are leveraged, so you only to deposit a value of the contract (between 5 10% for shares, and 1% for indices) to trade.

* Some brokers do not charge commission. Others may charge a small 0.15% either side of a trade.

Disadvantages

There are, of course, some drawbacks to CFD trading.

* You can easily be wiped out. Because of leveraging, a small decrease in a share price can wipe out profits.

* There are lots of scams targeting CFD beginners. Be wary, and if anything looks too good to be true, then it probably is.

* You dont actually own any shares and are not eligible for dividends and other shareholder benefits.

* You are liable for Capital Gains Tax (CGT)

* CFD trading isnt for the fainthearted. You need to research and practise (on paper or virtually) before committing time and money.

Getting Started

You need to find a good broker to start. Look for one that is regulated by the Financial Services Authority (FSA) to ensure you are dealing with a firm that is licensed to offer CFD trading.

Starting capital varies according to brokers. You might need anything from a few hundred up to a few thousand. Check first. You will also need to provide proof of name and address. The broker may also check your employment and income to ensure you can afford to trade CFDs. Have all the paperwork/contact information to hand. They may call you if they have any questions about your background.

Start paper trading first to understand how CFD works and to build a starting strategy. Some brokers offer virtual trading online to help find your feet; take advantage of this if they do. Watch any seminars offered and research the markets before making your first trade.

Good luck with CFD trading, and we hope you will enjoy this fun and exciting way of investing.

A guest post by Daniel P from Sunbird Gold & Silver

Please note that the Fiscal Muse is not a financial advisor and has no real experience in trading on the stockmarket. Ensure that you seek professional advice from an FSA before entering into any investment.