What is CFD Trading? – CFD trading explained
A CFD or a contract for difference is essentially a contract between a buyer and seller. The contract stipulates that the buyer must pay the seller the difference between the present value of an asset and its value at contract time. It’s important to remember that when trading with CFDs the buyer never actually owns the underlying asset. So, what does all of this actually mean? Let’s make sure you have CFD trading explained to you properly.
Basically, this means that while you don’t actually own the underlying asset that you bought your CFD contract for, you can see a profit based on the price change of that asset in the market. You are essentially betting on what the future price of this asset will be. You either go “long” on your trade which means you think the price will rise or you go short on the trade believing that the price will decline. The price that you enter at with your CFD versus the price you exit the trade at will equal the money you either made or lost.
What are most important facts?
The most important concept to understand when it comes to CFD trading is what a “leveraged position” is. In short, you can pay for a CFD contract which would be your upfront deposit for a much smaller amount of money. The broker you are using will then front the rest of the full value of the trade. Let’s take a look at an example to help make things a little more clear for you.
Let’s say you want to go long on Apple’s stock price which is currently valued at around A$180 a share. So, if you wanted the total value of your trade (exposure) to be, let’s say A$10,000 you would then need to buy around 56 CFDs. This is where the leverage position is important. If you come into the trade with the broker offering, say, a 95:5 leverage you would then only need to pay 5% of the total exposure being A$10,000. That would bring your total for your 56 CFDs to around A$500.
What does this mean?
All this means is that the broker is covering the rest of the full value of the trade. However, you are still entitled to 100% of the profit should the price of Apple shares rise. The kicker here is, that you are also responsible for the loss of capital should the price points of Apple go down. So, if the price of the Apple shares rose from A$180 to let’s say A$200 you would then make a total profit of A$620. So, the difference in your opening position to when you closed the trade. This would essentially equate to A$20 x 56 contracts = A$620.
As you can see, there is great profit to be made using CFDs whether trading with shares, forex, indices or commodities. But it’s important to remember that the flipside of this coin is that you can also lose more than you initially opened your position with. We suggest taking a look at our CFD trading page for a more detailed look at what else you can expect with this form of trading. This is of course only after you have read our CFD trading for dummies article.
How to Find the Best CFD Trading Brokers
As someone who might just be starting out with any kind of trading, it can be daunting to try and find a quality online broker. With so many options out there, that is an understandable feeling it has. We are here to try and make your life a little easier when it comes to finding a broker that fits your needs as a trader.
At Wetten.com AU we do all of the research and hard graft so that you don’t have to. We want to cut out the hours you would have otherwise spent on the web trying to locate a suitable online broker. We conduct in-depth reviews of all the popular and lesser known online brokers that are available for Australian residents to use.
We then rate and rank all of these online brokers based on the criteria we have tested them against. You will be able to find the best CFD broker for beginners on our site with minimal effort and you can rest easy in the knowledge that we critique these sites objectively to make sure they are safe for you to use. You can always come back to the Wetten.com AU site to check out our updated rankings and reviews. We can also show you how to buy ETF in Australia as well.
What Makes a Good CFD Trading Broker
While you can always use our comparison tool, rankings and reviews on the Wetten.com AU site, it’s always useful to know just what sets the best CFD broker for beginners apart from the rest. Here are a couple of things to keep in mind when looking for the best CFD broker for beginners:
Licensing & Security
When it comes to finding the best CFD broker for beginners, there is no substitute for strong security and legitimate licensing. Before you have even had CFD trading explained to you, it’s best to make sure that the site you are interested in is absolutely safe to use. This is usually done by checking that the license they hold is from one of the renowned financial associations and that their security employs the latest in SSL encryption technology.
Once you have really taken in the information after having CFD trading explained to you, you will want to find an online broker that has reasonable trading fees. There can be a number of different trading fees on these platforms but what you want to look for specifically is the commission charged by the broker (usually 0.1%), the financing costs if you buy assets and the overall spread. While the standard commission charged is 0.1% you can find online brokers that charge zero commission fees and very modest financing costs. Always take a closer look at what some of the fees on these platforms might be.
Range of Assets
The best CFD broker for beginners will offer a host of markets and investment avenues on their site. However, we are looking specifically at what kind of CFD markets you can expect to find on these platforms. When joining a broker to specifically trade with CFDs you will want to see markets like forex, indices, commodities, shares and treasuries. You can even find brokers that let you trade crypto through the use of CFDs. All of the above contributes to a CFD trading experience that is fulfilling and diverse.
Online brokers who make CFD trading for beginners easier by having useful educational tools on their site is always a good place to start. These educational tools can include anything from helpful explanation videos and research analysis to blog posts on the latest market changes. They may even offer you a CFD trading course to take part in which will break it down into CFD trading for dummies. We highly recommend taking a brief CFD trading course to help you better understand the finer points of this trading method.
CFD Trading Tips for Beginners
Once you have found the perfect online broker that makes CFD trading for beginners accessible, you will need a couple of useful tips to help nudge you in the right direction. Here are a few tips from our expert team at Wetten.com AU that you should keep in mind when going forward with any CFD trading endeavours.
Practice with a demo account:
If you are a generally impatient person, then the demo account option may not sound all that appealing to you. However, a demo account can really help you to get the lay of the land when it comes to CFD trading for beginners. You can still have CFD trading explained to you but after spending enough time on a demo account and trying all the different aspects of the platform you will have almost taught yourself.
Demo accounts are a great avenue for you to practice your CFD trading as it is completely risk free. You trade with imaginary funds that the broker gives you and you can test out the platforms and different trading strategies before you actually give it a bash with real capital. The best CFD broker for beginners should be making a demo account option available to you.
Do your homework:
This is a fairly straightforward piece of advice but no less important than any other. What we mean by doing your homework is that you should try to stick to a smaller number of CFD markets and get comfortable with them. CFD trading for beginners can seem more daunting than it is because of the plethora of different markets available. Narrow these markets down for yourself and get used to trading with a set amount of different instruments.
Use stop-loss orders:
This is probably the most important bit of advice you will receive about CFD trading for beginners. As we pointed out earlier, there is great profit to be made but all severe losses as well when it comes to CFD trading for beginners. So, what is the best way to combat these potential losses? That is easy, use stop-loss orders.
A stop-loss order is something that you can put into place that will exit a CFD trade for you automatically once it reaches a certain price point. Basically, you decide at what point you want to exit the trade when the price of the asset has gone down. This way, you minimise your losses more quickly.
Limit your leverage:
As we mentioned earlier, you will find that many online brokers will offer you exceptionally high leverage for your CFD trades. This can seem very appealing at first because you are only really looking at the potential profit for a positive outcome on the asset’s price rising. However, it is best to limit your leverage because if you come into the trade with the leverage being 99:1, you may need to back out of the trade even if the price of the share only moves by a fraction of a percent.
Using leverage to your advantage can be done but it’s best to approach it with a healthy amount of caution. Pick your times wisely when you want to try and cash in on a decent amount of leverage for your CFD trades.
A Couple of Our Favourite CFD Brokers
You should at this point have a lot more knowledge to go out there and pick an online broker that is going to serve your CFD needs fully. However, we still want to point you in the right direction with a couple of our favourite online brokers that offer an exceptional range of CFD markets for you to choose from. Here are a few of our personal favourites:
Plus500 offers users CFDs over thousands of different financial instruments. It was also one of the first online brokers to extend leverage when it first became available as a CFD in 2013. You feel a healthy range of payment methods and exceptional features at Plus500. Australian residents who are new to trading won’t be overwhelmed by the platform as it is very user-friendly which makes it one of the best online brokers for beginners in Australia.
With eToro, Australian traders will have a platform that is dynamic and intuitive. The eToro trading platform is perfect for CFD trading for beginners as the site is largely tailored to users who are fairly new to the world of CFD trading and investments.
The trading platform is perfect for CFD trades as it offers a plethora of financial instruments to use. The trading fees are very low for the most part. Furthermore, users can take advantage of the demo account option to test out the site before they actually sign up.
CMC Markets is a perfectly balanced trader that is great for CFD trading for beginners but also for more experienced traders as well. The platform is feature-rich, offering a number of different trading tools and data analytics.
There are few online brokers who offer such in-depth educational tools on their sites. Users can continue to grow and learn on the CMC Markets site with a number of different tools at their disposal. CMC Markets are also known to be one of the best forex brokers around so we suggest taking a look at our Forex trading for beginners guide as well. We go on to give you even more information with our how to trade Forex Australia guide as well.
Conclusion – CFD trading for beginners
That brings us to the end of our CFD trading for beginners piece. If you didn’t even know what CFDs were before reading our piece hopefully we have now piqued your interest enough to go and test it out. CFD trading can be immensely profitable but you need to always take into account the level of risk you are taking on with any CFD trade. And, as we mentioned before, be wary of how much leverage you decide to take on for each open position.
We recommend checking out our CFD brokers Australia page to take an in-depth look at who the best brokers for CFD trading down under are!
CFD Trading for Beginners FAQ
🏅What is CFD trading?
At Wetten.com AU, our online broker reviews and guides give you a detailed but bite-sized breakdown of what CFD trading is and how you can best go about trying it out safely. There are a number of considerations to take into account which we have listed in a graspable way for you.
🖋️Can I find a CFD trading for dummies article to help me?
Absolutely you can. And that CFD trading for dummies article is right here on Wetten.com AU. We know that trying to understand a new form of trading can be tough and can seem like a lot of information to take in all at once. Be that as it may, we make sure to give you this information in the easiest way possible so that you can give CFD trading a chance just like everybody else. Be sure to take a look at the rest of our online brokers in Australia guides too!
📈What markets can I trade with through CFDs?
As you have CFD trading explained to you with our article, you will start to learn more about what kind of markets you should have access to through CFDs. We also give you some of our favourite brokers that offer you the most diverse range of financial instruments for you to trade with CFDs.