CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. See our full Risk Disclosure and Terms of Business for further details.

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CFD trading is a very popular way of derivative trading. CFD traders speculate on the price changes of a certain trading instrument such as Forex, Commodities or Indices. Trading CFDs doesn’t involve buying or selling of the underlying asset, so there is no physical delivery of a CFD. 

Put simply, CFD is a contract between a buyer and seller and it is short for Contract for Difference. The difference part refers to the price of an instrument at the opening and the closing of a trade.

What are the advantages and disadvantages of CFDs?

Before the introduction of CFDs to retail traders in the late 90s, traders were tied to the asset value. This means if the asset they own decreases in price, they would lose money and the only option for them was to sell the asset as soon as possible to minimize the loss or accept the loss and hope for a recovery in the future.

CFDs enables traders to benefit from price changes in either direction. By going short (selling), traders can profit even if the price is moving down. Going long, on the other hand, means buying and requires prices to move up in order to generate profit.

An example:

Let’s say you decided to trade CFDs for Facebook shares. You believe Facebook stocks will sharply fall in price today. Knowing that Facebook shares will fall, you can quickly deposit funds into your CFD trading account and open a sell position (go short) in the Shares market. When the Facebook shares drop in value as you predicted, you will profit - even though you do not own any Facebook shares on paper! 

However, if Facebook shares gain value instead, you will lose. Because CFD prices go parallel with underlying markets.

What are Leverage & Margin?

In margin trading, leverage means being able to manage a larger position than your actual investment. Your capital is considered collateral and you are offered a proportionally larger position by a brokerage company. Leverage can potentially amplify your gains as well as your losses.

Traders can use leverage to take larger positions in the market than their initial investment. For example, if you wanted to buy CFDs for 1 lot of Facebook shares without leverage, you would need to pay the whole sum, matching the current price of Facebook shares. But with leverage, you only need to deposit a certain percentage to control a position for Facebook shares in CFD markets. 

The smaller portion you deposit is called margin or collateral. Depending on the asset and the regulations, you will be required to invest only a part of the necessary deposit. In most cases, the ratio for stock CFDs will be 20:1 for European regulations (and 50:1 for outside of Europe). This means you would only need to deposit 5% of what is necessary to trade 1 lot of Facebook shares in CFD markets. 

As the price for Facebook stocks change with each price movement, your position in the market will make 20 times bigger moves to match it. Your gains or losses will proportionally change as well. While your gains are magnified with the leverage, your losses are also subject to the magnification. 

If your margin falls below a certain threshold, your position will automatically be closed. But even so, keep in mind that you may lose more than your initial investment due to rapid price changes. Thus, it is vital to place protective measures such as ‘stop-loss’ orders to avoid such scenarios. 

GKFX Prime notifies you if your margin falls below predetermined levels. This is called the margin call. If you receive a margin call from your CFD provider, you need to increase your equity in order to free more margin and to keep your position open. If your margin is too little to keep up with the change, you will need to top up your account balance with another deposit. 

Is CFD Trading Risky?

The answer is yes, as mentioned before, leverage magnifies both gains and losses and this fact carries with it the risk of losing more than your initial investment. 75% of retail investor accounts lose money when trading CFDs with GKFX. Another risk for traders is market volatility. There are many factors that cause sudden and unpredictable changes in the markets. However, with proper risk management, you can protect yourself from these risks.

Self-education is crucial when it comes to CFD trading. You must learn about CFDs before making an investment. You can read articles, e-books, watch video tutorials, and test your skills on a demo account. Or you can get help from an experienced trader. By learning more, you will be able to develop better risk management skills.

How to Start CFD Trading?

If you think CFD trading is for you, then you can open a CFD trading account easily. 

1)    Fill out the registration form here
2)    Download a trading platform or access Webtrader
3)    Login with the credentials we sent via email
4)    Deposit using your preferred method
5)    Start trading immediately

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