Understanding CFDs

Beginner • Course 1

In the world of investments, there are different types of investment products; it's not just stocks and properties. The difficulty for investors is selecting the right product for their portfolios or as part of their trading strategy. It is important for individuals to start understanding the products offered and determine if they are appropriate for them.

All traders have different goals, requirements and risk appetites. Therefore the product must tick all the boxes. CFDs have been popular since 2014, but investors must consider both the benefits and disadvantages.

What is a CFD?

So what is a CFD? A CFD (acronym for contract for differences) is an investment contract allowing you to speculate the price direction without owning the actual asset. The price of the contract will mimic the underlying asset. For example, if the price of the NASDAQ is $10,000, the price of NASDAQ CFDs will be the same. If the price increases to $10,100, the CFD again will simultaneously do the same. However, this doesn't help much, so let's dive deeper into understanding CFDs.

Why Trade CFD?

CFD popularity has significantly increased as investors look for the following features which are offered by CFDs:

Leverage - leverage is when the broker allows you to increase your purchasing power by trading on a margin. This is known to have benefits and disadvantages, which we will look at as part of the course.
Shorting - Shorting refers to speculating the price of an asset will decline. For example, if the price of a stock is trading at $100, a trader can speculate the price will decline. If the price declines to $95, the trader earns $5 profit.
Liquidity - the ability to easily and quickly close trades to exit the market.

Learn and test your knowledge using our interactive trading course.

Take the course quiz

Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

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RISK WARNING: Derivatives are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money. This is not investment advice. Trading with NAGA Trader by following and/or copying or replicating the trades of other traders involves high levels of risks, even when following and/or copying or replicating the Lead Traders. Such risks include the risk that you may be following/copying the trading decisions of possibly inexperienced/unprofessional traders, or traders whose ultimate purpose or intention, or financial status may differ from yours. Before making an investment decision, you should rely on your own assessment of the person making the trading decisions and the terms of all the legal documentation.

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