The world of finance is a large and complex one. There are various types of investments you can make to help diversify your portfolio – however, they don’t all have the same level of risk that they bring with them. One such investment option is called CFDs, or Contracts for Difference.
What is CFD?
CFD trading lets you theorize on the price movement of an asset without owning it outright (such as stocks). If you think the price is going to go up, you will buy the CFD; if you think the price will go down, you will sell it.
To continue this example, let’s say that the stock is worth $20 today, but in three months, its value has risen to $22; with CFD trading, you would buy the CFD when its price was $20 and sell it to someone else when it rose in value.
What risks can you expect with CFD trading?
One risk is that you’re not buying an actual asset, so you will lose your initial investment if the price does not go up. The second risk comes from leverage: a trader can get into a lot of debt by borrowing money without owning any assets. If the price moves in their favour, they make lots of money; but if it moves against their positions, they could lose everything.
In addition to this, there’s also counterparty risk. It refers to the possibility of loss occurring because one party fails to meet their contractual obligations to another party. These counterparty risks have to be managed by putting down a margin deposit in the CFD trading world.
How to use CFD trading in Singapore
In the fast-paced world of trading, CFD (Contract for difference) trading is a form of investment where traders make money based on the difference in performance and price between an asset and its underlying. If we use the example of Singapore Airlines stocks, if you think it will go up or down by 30 points in a week, you can buy or short sell their CFDs to gain from that change in value.
However, since this type of trading requires no physical purchase of shares (and thus no barriers such as broker fees), there is additional risk compared with traditional stock exchange trades.
Steps to take if you want to try CFD Trading
- You must be aware of short-selling risks and understand that your losses can be theoretically unlimited.
- Ensure you’re able to judge the performance of Singapore Airlines (or other shares) stock accurately to know if you’ll win or lose from buying CFDs.
- Since leverages are used in this type of trading, ensure you fully understand their potential benefits and keep in mind how it could potentially increase your financial risks when using leverage.
- Never borrow money for margin trading purposes without researching what kind of risk capital is required for each trade – there should never be any borrowing to gamble with CFD Trading!
- Always set aside a specific portion of your investment portfolio purely for trading
What are the advantages of CFD trading
The world of investing is filled with opportunities, but not all are good. Some allow for huge returns on investments (ROI), while others can cost you more than any return will ever make up for. So how do you know which investments offer the best ROI?
One way to evaluate an investment opportunity is through CFD trading. Through this type of trading, investors can trade financial products, including stocks, currencies and indices. While there are some risks involved in CFD trading, there are also significant rewards that come along with it.
In conclusion, there are many risks involved with CFD trading. On the one hand, it lets you speculate without the need for a significant initial investment, but it could result in massive losses if things go wrong.
Weigh the pros and cons before deciding whether this is something you want to get involved in.
If you are looking to start CFD trading, try a demo account offered by Saxo CFD broker before investing real money.