What is CFD Trading?
CFDs are traded on margin. The principles behind trading CFDs are very similar to those of forex
When you start trading CFDs you will see that the price quoted is actually a two-way price. For example, taking the FTSE 100 as an example, you may see the price is 6300 – 6302. The lower price (6300) is called the ‘Bid’ price or ‘Buy’ price, and the higher price (6302) is called the ‘Offer’ or ‘Ask’ price. This two-way price is called a ‘quote’. This quote is what any price provider, who is also called a ‘market maker’, will give to you every time you request a price. The Bid price is the price at which the market maker will buy the CFD, so is therefore the price you can sell at. While the Offer price is the price at which the market maker will sell the CFD, so the price you can buy at.
One advantage of CFD trading is that you do not have to pay the full cost of the trade up front. Instead you only pay a small percentage of the cost up front. This cost is called ‘margin’. This is why this type of trading is called ‘leveraged’ trading – you only put down a small amount to control a much larger quantity of asset. For example, if you are trading on 1:100 leverage, this means you will typically pay 1% of the value of your trade as a deposit; thus freeing up your funds.
However, leverage can be a double edged sword. This is because the leverage not only helps you magnify any gains you may make but also magnifies the losses you can take relative to the amount you have deposited!