Contracts for Difference (CFDs) are one of the riskiest investments and many people still do not understand exactly what they are and how they work. A CFD is simply a contract whose value depends on some underlying asset, which could be a commodity, a share, a market index or any other financial asset. There are usually two parties involved: the buyer and the seller. The two parties transact based on the movement in the value of the underlying asset and only one gains while the other loses. CFD trading is much more complex than trading in other financial instruments and many investors get into it without adequate information and end up making huge losses because of this. Before you decide to trade in CFDs, you have to be sure that you can afford the additional risk.

Risk and Return

CFDs are a very high-risk investment but as with most other high-risk investments, the potential returns an investor stands to gain from trading in them are very high. Investors often assume that CFDs are a get-rich-quick investment option but this is not so. In fact, you need to put in a lot of effort as the trades need to be regularly monitored if you are to gain anything from CFD trading. The additional risk involved in CFD trading is as a result of the fact that the investors trade on margin rather than on the actual value of the assets. This is the same reason why traders stand to make higher returns when they trade in CFDs than when they trade in other conventional investments such as shares.

When trading in shares and other commodities, a fall in prices definitely results in a loss for the investor. But in CFD trading, you can easily benefit from a fall in commodity prices if you choose your trading position wisely. If used correctly, leverage can greatly boost an investor’s returns. But you must be cautious when using leverage to ensure that you do not take on more risk than you can handle.

Is CFD trading for you?

CFD trading is good for seasoned investors who can afford to take big risks with their money. Considering all the above factors, CFD trading is a great investment option for institutional investors as they can afford to take big risks with their investments. Additionally, they have more money and can diversify their portfolios to hedge the high risk involved in CFD trading.

However, this is not to say that individual investors cannot take part in CFD trading. In fact, CFDs are good for hedging investment portfolios when the financial markets are volatile. But if you decide to trade in CFDs, you will need to use a hands-on approach. This is unlike many other investments where you can just sit back and wait for your money to grow. You need to have a good understanding of the financial markets, and this comes with experience from years of trading. Alternatively, you can use an investment firm to handle your investments for you if you do not have the time and/or experience needed to do it yourself.

 

Choice of trading platform

Several online trading platforms, including CMC Markets, offer CFD trading. Your choice of trading platform will have an influence on your performance in CFD trading. Choose a good and reputable trading platform with resources to help you learn more about CFD trading, one that is secure and one that is easy to use. If possible, do a trial of various platforms before deciding which one to trade with. With enough research, you should be able to find a good CFD trading platform that can meet all your investment needs.

Conclusion

The most important thing in any investment decision is to know your investment goals so that you can choose investments that can help you meet those goals. Clearly, CFD trading demands a lot more than most investors assume, but if done correctly, you can reap big from it. CFDs may be a high-risk investment but that’s part of the thrill that comes with investment; the uncertainty involved because of the volatility of the markets, the highs and lows when you win and lose – all that makes it even more rewarding.