Firstly, this type of trading is different from a traditional stockbroker.
A stockbroker buys the stock and charges you a commission, you hold it or sell, if it goes up you make money, if it falls and you sell, you lose. However, you can hold for as long as you want if the company lasts. (Been there)
With CFD’s (Contract for Difference), you will not own the stock, share, currency pair or commodity you are trading. You are just using the price(underlying) the online broker offers at the time of the trade and you simply decide the direction you believe the asset will go over a period of time, decided by you or your margin.
In simple terms!
CFDs trading allows you to gamble/bet/speculate or even guess 😊 on whether the asset prices will go up or down, without buying it. You make profits if you chose the right direction or loses if you do not. It is not exactly binary but there is a technique to this.
An example, we love Tesla today, if you had the foresight to trade the stock up over the past year, you would have made an excellent trade, time-dependent.
If you thought Boeing would make a recovery and traded it up and COVID appeared, you would have incurred a lost trade.
CFDs use leverage,
Leverage works by using your deposit, known as margin, to provide you with increased buying power to an underlying asset. This is a two-sided sword, works great when the trade is in your favour but terrible when it is not. The exposure is the same both ways.
Why trade CFD’s?
· You do not require the full price of the asset to trade., using leverage and therefore can speculate on numerous assets.
· Time, you do not need to keep a position open for long if it goes your way and you can control your exposure.
· You can profit if you have a short position and guessed correctly. Therefore, if you believe the asset will lose value.
· Great way to join the financial markets and gain knowledge.
· It requires an understanding of leverage and is somewhat complex to a novice, you need to know how to use a computer, not my mum.
· As you do not physically own an asset, you are only holding the price for a short while, trading not investing.
· Can become addictive, a bit like sports betting.
In conclusion, invest in stocks if you don't like the risk of leverage.