CFD trading is the purchase and sale of contracts for difference (CFDs) through an online broker. A trader earns profit based on the difference between the price from when the contract started and the price when the price is sold.
What is Long and Short in CFD Trading?
Long and Short are used to describe which direction of the trade you are going to take. Long means you believe that the price will move on an uptrend, and Low means you are predicting that the price will take a downtrend. Similar to traditional trade, you can earn when the price goes up. Also, you can make a profit when the price goes down. This is referred to as going short.
For Example, based on your research, you believe that Apple stock will fall in value, You can make a CFD contract and short it where you make money when Apple’s stock price falls.
One of the advantages of CFD trading is leverage. This allows a trader to have a bigger exposure without having to invest the full amount required to open a trade. The broker will just require you to deposit a certain percentage of the total amount that acts as collateral. The rate would depend on how big the trade is. Leverage is a double-edged sword. It can have huge returns but it also increases your risk. For this reason, you must pay attention to the leverage ratio and ensure that you are trading within your means.
Margin trading using CFDs is another method to explain leveraged investing. The ‘margin,’ which is a proportion of the position’s entire worth, is the amount of money required to open and maintain a leveraged position.
When selling CFDs, there are two sorts of margins. A deposit margin is required to open a position. A repair margin, on the other hand, maybe required if the trade is on the verge of incurring losses that aren’t covered by the deposit margin or any surplus cash in your account. If this happens, your provider may issue a margin call, instructing you to replenish your account’s money. If you do not add sufficient monies, the role will be closed, and any damages will be recognized.
CFD trading might seem easy but these are just some of the common terms that a trader will encounter. There are more terms that a trader will learn along with his trading experience. It requires time because it is a never-ending process of studying and learning about the market. Getting more experience and learning about these terms will help a trader achieve a positive result.