What are CFDs?
CFD is short for 'contract for difference'. It is a derivative product where your profit or loss will be based on the difference in price between your opening and closing position. These positions are typically held for a short period, which means you can react quickly when the price of an asset starts to rise or fall.
Traders can settle the final contract with a CFD broker with cash – instead of physical goods or securities. As a result, settlement is easier and faster.
By not owning the asset outright, CFD trading means you can get started with a fraction of the value involved. This form of 'leveraged trading' enables you to open positions in excess of your initial outlay. So, for example, forex CFD trading can give you 30:1 leverage with the GBP/USD currency pair – meaning you can trade £10,000 in the market with a deposit of around £334.
How to trade CFDs with FXCM
By trading CFDs, investors get all the benefits of owning the security without actually doing so. You can harness these contracts to take long or short positions, speculating on the underlying asset's future price movements. You can also use these contracts to hedge a portfolio, which is sometimes the most effective way to manage risk.
Pick an asset
First, decide on the asset you want to open a position on. FXCM is one of the leading CFD brokers – offering you hundreds of different instruments to choose from.
Take a position
The position you take will depend on whether you think the price of your chosen asset is going to rise or fall. If you think it'll rise, you want to 'go long' (buy). If you think the opposite, you'll 'go short' (sell). You'll also need to decide how much you want to invest.
Agree the contract
You'll then commit to a CFD trading contract that outlines your position – as well as any fees that may be involved. It'll also set out how much margin you require, which can differ across markets. The rate for commodities can vary compared to a major currency pair, for example.
Close your position
Your position stays open until you close it – or it reaches a defined exit point (such as a Take Profit or Stop-Loss order). Your contract might also have an expiration date. If an asset price performs as you expected, you'll make a profit on your CFD trade.