CFD trading stands for contract-for-difference trading. It is a way of trading securities that don’t involve owning them. It is possible to speculate on rapid price movements without ever buying the product itself.
It’s called a ‘contract’ because both sides agree on an equal value – so whether or not there is any movement in price, neither party loses or gains anything from their position whatsoever after the contract closes out. However, if one side has increased value, whoever holds the other will lose money equivalent to that gain (the difference).
A CFD allows a trader to control a significant value of shares with a relatively small amount of money, making it possible to buy or sell more efficiently and take advantage of short-term price movements. You can find more information here.
Register an account
Sign up with a CFD broker. It’s best to work with regulated people, so you know they’re safe to trade with. At the very least, a broker should have their own servers, and you should not use white label brokers (those using other companies’ technology).
Make a deposit
Search for a broker that allows you to deposit large amounts of money – ideally 10,000 dirhams or more. Make sure the firm offers multiple payment methods to choose one that is convenient for you.
Set up your trading account
Register with an investment management company that will allow you to open an investor’s account to buy and sell CFDs on margin. You should find one online quickly enough by doing a Google search.
Understand margin requirements for CFDs
Each CFD has a margin requirement, which is how much money you need to open the position – e.g., if it’s 50%, you’ll need to have at least half of the trade’s value in your account before opening the position. Margin requirements will vary depending on which product you’re trading, so carefully check this for each product.
Understand leverage when opening positions
When operating with CFDs, it’s essential to understand that risks are involved, especially when using high levels of leverage. For example, if you were using 32x leverage on investments of 100,000 dirhams and that value dropped by 2 per cent, you would lose the trade value.
Determine which CFDs you want to trade with
Some traders like to trade with indices such as the FTSE 100; others prefer to focus on individual stocks like Facebook and Apple. There’s no consensus on which is better – it depends on what kind of trader you are and how much experience you have. However, for newbies, indices often prove more stable and less volatile than individual stock CFDs because they’re made up of several different companies, so there’s less chance anyone will drop dramatically in value overnight.
Open your first position
When you’ve chosen a CFD (e.g., indices or individual stocks), it’s time to open your first position. You can do this via an online platform or email the broker directly if you have any questions. When opening positions, there are certain things you should be aware of, including:
- Closing out your CFD early means locking in your gain/loss, so always check the contract terms beforehand. Some contracts only offer hourly expiries while others might be as long as one week, creating a ‘week rollover’ where positions remain open until that date has passed before closing out.
- Some brokers will offer to close trades for you at their discretion, but this is risky as you’re giving them the power to close it for you, which could be harmful if the market moves against your position.
- You’ll need to consider all associated costs before opening a trade. For example, if two trades are available – one with £10 commission and another with £50 commission – then choose the cheaper option rather than trying to get away with trading under-priced contracts.
Monitor your positions
You must keep an eye on your positions throughout each trading day. Margin call levels differ depending on what CFDs you’re trading, so make sure you check this before opening or closing any new positions. Always watch out for news events that might affect prices, too – even if you’re not trading with a CFD that might be affected, it could still affect related sectors and, therefore, your position.
