London’s financial sector is the largest in Europe, and many investors are looking to take advantage of this city’s great opportunities. One popular way is through Contracts for Difference (CFDs), which allow you to access financial products without actually owning them.
What are CFDs?
CFDs are transparent financial products that were first created over 30 years ago. They have been used by traders all around the world ever since. These financial products, often referred to as derivatives, allow traders access to the movements of an underlying asset without having to purchase any units of that underlying asset. That means it’s possible for these traders’ portfolios and losses or gains not to be exposed directly to movements in the underlying asset price, just a tiny change in the price of its derivative.
The most popular CFDs available today are on indices, stocks and foreign currencies.
Advantages of using CFDs
CFDs are particularly good for short-term trading when speculating on prices falling or rising very quickly. While it’s possible to win big when markets go in your favour, it’s important to remember that if your prediction is wrong, then you could lose out just as quickly.
This means that traders must undertake careful research into all possible outcomes before buying a CFD. These instruments can help people gain exposure to market movements while limiting risk, but they aren’t suitable for everyone. If you’re in London, it’s worth finding out more about CFDs before taking the plunge.
Trading in CFDs means practising trading and still working a full-time job. You can also potentially make more money than you would with an average day-time job, with the same time spent on it. It is possible to become a successful trader with little to no prior experience and knowledge of technical analysis or cryptocurrencies.
CFDs are not only traded in London. They’re traded worldwide, and it’s even possible for you to access your account from anywhere as long as you have an internet connection. However, the London root does mean that there’s more regulation than there would be if, say, Dubai was the base for this type of trading. This is because brokers based here must follow strict rules set out by the Financial Conduct Authority (FCA), ensuring greater safety and security for its traders.
Risks associated with trading CFDs
If you expect an asset to increase in value, but it does the opposite, you may not only lose the money you invested initially but also some or all of your initial margin deposit. That’s why traders are strongly advised to set stop-loss orders on any open positions – this means that if a trade begins to go wrong, they immediately close it out so that they don’t lose more than their initial margin.
There is no central clearinghouse for CFDs – this means that if your broker goes bust, it’s unlikely that you’ll receive any compensation or reimbursement of funds.
How to get started trading CFDs
To open an account with any broker, you need to choose between two different types: a discretionary and non-discretionary account. The choice between the two comes down to your trading style; if you like needing an expert by your side to help out with every trade, then go for a discretionary account. If, however, you feel that you don’t need anybody else choosing your trades for you and want the machine trading for itself, then choose a non-discretionary account.
CFD trading can be an exciting way to try out your skills and potentially make money if you follow these simple steps. Remember, though: it’s essential to read up on everything before starting and expect that you’ll lose your first couple of trades. Also, remember that nobody ever got rich overnight from trading; patience is vital when it comes to earning more than just pocket money. New investors interested in trading commodity CFDs should contact a reputable online broker from Saxo Bank and start trading on a demo account to practise different trading strategies.