What Is A CFD And How Can I Make Money From It
What Is A CFD And How Can I Make Money From It?
Trade and investment in the business world come in many different forms. At the oldest part of the business spectrum, there is the way business has been done in the past and continues to be done today; the buying and selling of products. In this model, people only make money when something is sold at a price that allows for profit. This is the basic concept behind the trading of stocks and bonds, commodities, and currencies on a traditional currency market.
Other ways to make money rely not on ownership, but an understanding of how a market behaves. If someone has a good reason to believe the price of an asset will go up, or down, it’s possible to invest in this belief that the price will move a certain way. If that belief turns out to be right, that’s how the money is made. It’s similar, at the most basic level, to betting, but with higher stakes and more opportunities for investment. This is known as speculative trading since the traders make speculations about how they believe a market will react, and then put down money based on their speculation.
There are a lot of different ways to make speculative trades, with a specific focus on currencies, like with Forex trading, to the more versatile binary options trading that covers a broader field of assets. And then there is something known as a CFD, which operates along similar principles but has some critical differences. So what is a CFD? Is it for you? Let’s take a closer look and find out.
The Sky’s The Limit
First, let’s look at the more contained and controlled binary options trading system. It’s a speculative form of trade, just like CFDs, but there is only one very simple result; right or wrong. With a binary option trade, the trader will work alongside a broker, perusing the different stock, currency and commodity possibilities and settle on making a speculative trade for whether, for example, the price of a company’s stock is going to go up or down.
In the case of binary options trading, returns on trades are fixed. In our hypothetical situation, the binary options trader is looking at a return of 85% on whatever is being invested. This means that if a trade is made for $1000 on a “call” trade predicting the price of the stock is going to go up, the trader already knows in advance that should the trade be successful there will be a profit of $850 from the trade. Conversely, should the trade fall through and the results are not what were expected, the loss is going to $1000, exactly what was put down on the trade.
CFDs operate very differently. CFD stands for “contract for difference,” and while it is a speculative form of trade as well, where it stands out is in the final outcome. “Difference” here means the difference between a prediction and the final result. Here, the focus is not so much on whether a price moves up or down according to prediction, but by how much the difference is between when the trading starts and when the trading period is over. How much you make—or lose—is tied into the final result of trading.
A Question Of Control
This means that with CFD trading, you lose one important aspect. The certainty of final results, and for some people, that is exactly the reason why it is so appealing, whereas to others, that is the reason they’re not drawn to it. With binary options trading, your win and your loss are “locked in.” You always know that what you lose if a trade goes badly is exactly what you invested. In the same way, you already know the final outcome if your trade succeeds, it is the percentage of return that is defined by the broker you choose to go with. The only uncertainty, in this case, comes from your own skill as a trader, and whether you made the right prediction.
CFDs place your final result in a much more uncertain place, for both good and bad. If you make a prediction about a price’s movement going down, and you predict it will only go down a few cents, but it drops far more than that, you stand to make much, much more money since the final result exceeded even your original prediction.
But the same holds true for the opposite result. If you predict a price will go down, and you are catastrophically wrong, and the price goes up and up, you don’t just lose whatever money you were initially willing to trade. Your losses will continue to mount, equal to just how wrong you were, potentially putting you into debt, and meaning you owe far more than what you originally traded. For some, it is this risk of a high win and high loss that adds more appeal to CFD trading. For others, this very uncertainty makes binary options trading a much more attractive choice.
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