It’s always a trend to make money on trends. Knowing what’s up takes your value up. One of the ways to make money on your forecasts is to trade CFDs and sing when you predicted the asset price right. Like any other sort of speculation, this one has both attractive sides and risky elements, so let’s talk about them.
What’s a CFD?
Let’s start from the very basics: CFD stands for Contracts for Difference. It means that you speculate on the difference between the current value of a certain asset and its value by a certain moment of time. If it’s positive, the buying side makes some money; if not, the seller wins it. This sort of contract emerged in the UK in the early 1990s and became very popular since. In the late 1990s, it was the form of contract that went online the easiest.
The benefit of entering the market via CFD is that this kind of trading doesn’t oblige you to deal with real assets. No large sums to invest and risk. No logistics to deal with physical resources. It’s a most abstract sort of deals, though real money can be made on it.
How to Earn on CFDs?
It’s quite simple and seemingly easy. You place your funds and make a forecast about some asset, whether its price will increase or decrease within some period. This period can be of very different length, from minutes to months. If your forecast is right, you get some money – as if you have conducted some actual operation with this asset and made a bit of cash on it. If not… Well, risk has always been a part of it.
It may resemble gambling. But while in gambling, you leave most of your success to chance, in CDS trading, you have your information (mostly open, though who knows – maybe you keep in touch with some insiders?) and can conclude whether to put your money on rising or declining values.
What’s the Difference Between CFD and Binary Options?
While binary options are also very popular on the Internet, and the two bear similarities in terms of dealing with contracts without involving real physical or financial assets, there are differences. The most significant one is that binary options can bring predefined profit or loss, regardless of how much the asset value deviates from the starting point. With CFD, your profit or loss depends on how much the value has increased or decreased.
There are other similarities, though, based on both types of trading being attractive to amateurs. There are numerous trading sites on any of these, known for fraudulent actions. Some of them just use algorithms that cause new players to lose their investments sooner than expected. Others let you earn money but effectively prevent you from withdrawing it.
No wonder that CFD trading is effectively banned in the US, and American citizens are legally not allowed to invest there. American security laws prohibit this sort of activity. So, if you are an American, you need to keep from CFD trading – or at least be very cautious when doing it. The HK residents are also prohibited from doing CFD.
But we must warn you, though, that inside information has become one of the biggest problems for CFD traders when the Financial Service Authority found out that inside information could be revealed through operations with CFD’s instead of the underlying physical assets.
There is always a risk that authorities review their regulations towards CFDs, and acting the way you used to will become impossible. Accommodation to new rules may last months or years, as it depends on legal matters. Not that it happens daily, but, dealing with this sort of contracts, you must keep this chance in mind.
There is always a risk that your counterparty fails to complete their obligations, just not having enough funds. It means your success depends on your counterparty’s stability. Luckily, today brokers introduce escrow systems to prevent these losses.
Learning More About CFDs
If you want to risk some funds and invest them in the CFD business, you need to learn. But the learning process is quite easy. Any trading place will gladly offer you a demo account where you can see how the system works.
There is no need to pay for learning. You have some virtual funds from the very beginning, so you can see how it works when you invest, how it pays, what surprises it might bring. You must remember, though, that when the real money comes in, the psychology of the business changes. You may be reluctant to risk real funds as easily as you did with your demo bucks.
Finally, as CFD is a sort of margin contract, there is always a risk of margin call that may mean your deals are force closed.
Is CFD Trading Worth a Risk?
There is no generic answer to such questions. Still, there is something you should know. If you feel assured about your awareness and intuition, you can put some serious assets on it. If not, you can take it just like gambling, If you feel like trying CFD, name the sum you are not afraid to lose, and then invest it – like you would at a casino.
If you have had some experience with CFD trading and can recommend some brokers to go with, you can drop some names in the comments. As well you can recommend some libraries and lectures, online lessons or social media groups. The most welcomed part, though, is your personal experience: stories are priceless, as success grows on them.
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