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CFDs Trading Explained For Beginners
CFDs Trading Explained For Beginners
CFDs Trading Explained For Beginners
This form of investing is not without risk, which will be discussed below. However, leverage does
enable the spreading of capital in ways that normally would not be feasible.
Forex trading for example is not plausible without the use of leverage for most investors given
the high volumes needed to trade.
In the aforementioned example of gold shares, a trader’s profits or losses can be widely
augmented and crucially, losses can exceed deposits.
Consequently, it is always important to pay attention to the leverage ratio that you are trading
with to make sure this is within your respective means.
The Importance of Margin
Trading with leverage goes hand in hand with margin, which operates as the requisite funds
required to open and maintain a position.
Your account at all times when trading with leverage should have extra margin on hand in case
any position’s losses exceed your overall deposit.
This can result in a margin call, which sees the closure of all positions and the realization of all
losses.
Overall, there are two types of margin that traders need to be aware of. Deposit margin is
necessary to open a given position.
Conversely, maintenance margin reflects extra margin that can cover or buffer losses that your
deposit would not otherwise reconcile.
Unlike other forms of trading, it is advised to keep a healthy pool of extra margin in your accounts
to avoid any unforeseen losses or margin calls. The best defense against this is to set trading
stops.
These are levels that trigger and close a CFD position automatically to avoid a further move in
either direction.
This is crucial in preventing your balance from going negative and owing more money than your
initial deposit.
Conclusion
Overall, CFDs are a form of speculative trading that gives more flexibility to normal forms of
investing. The trade-off is more risk however, and investors should be aware of these before
actively trading.
CFDs cover an entire basket of assets and remain one of the most popular forms of investing on
offer at any brokerage. See what CMS Prime has to offer by exploring its CFD offering today.
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