What is CFD Trading?
CFD trading is a fast, efficient and cost-effective way to trade stocks, indices, currencies, commodities and even crypto. Curious about how it all works? We’ll explain everything you need to know about CFDs in this article.
CFD trading explained
CFDs, or to use the full name contract for differences, allow you to trade many different financial assets. Everything from Tesla stock to gold to Bitcoin to the FTSE 100 index.
You trade an asset up or down, and you can add leverage to multiply your position (more on this later).
However, there’s one important thing to understand with CFDs: you don’t actually own the underlying asset. The CFD simply tracks the price and gives you exposure to the asset.
In other words, you can trade the price movement of Apple without the hassle of buying Apple stock itself.
This is a simplified CFD definition, so let’s explain what’s going on when you make a trade.
CFD meaning (how does it work?)
The CFD is basically a contract between you (the buyer) and the broker (the seller). We’ll use an example to explain:
Let’s say you think the price of Apple stock will go up in the near future. So you buy a CFD at Apple’s current market price of $150.
You are now opening a contract with someone else. And at the end of the contract, you’ll exchange the difference in value from the opening price to the close price (hence, ‘contract for difference’).
Let’s say you’re right about Apple, and the stock goes up to $200. You keep the $50 difference. But if you’re wrong, and the stock goes down to $100, you owe the $50 difference.
While this might sound complicated, our mission at Stryk is to make trading feel as smooth and accessible as possible. So with your Stryk CFD account, the experience is simplified: you just pick the asset and choose whether you think it will go up or down.
We execute the technical stuff behind the scenes.
Benefits of CFD trading
Generally speaking, CFD trading can take some of the complexity out of trading. You don’t need to buy the underlying asset and custody it. It can sometimes be cheaper to execute the trade because you’re not dealing with the underlying asset.
The invention of CFD trading allowed more and more people to get access to the financial markets. You no longer needed an expensive stock broker or large sums of money to start trading. The low costs helped open up trading to a wider audience.
A brief history of CFDs
CFDs were first created in London during the 1990s by two UBS bankers, Jon Wood and Brian Keelan. They were initially adopted by hedge funds to give them easy exposure to stocks on the London Stock Exchange without the hassle of buying the physical shares.
Later in the 1990s, we saw several companies launch CFD trading platforms for the general public. The low-cost made it possible for ‘retail investors’ to get access to the financial markets. Nowadays, we have seen this evolve into trading apps such as Stryk.
What’s a CFD account and what does it offer?
A CFD account or CFD broker give you easier access to traditionally complex features, such as:
Long or short – With CFDs, you can ‘go long’ (speculate that an asset will go up) or ‘go short’ (speculate that an asset will go down).
Leverage trading – You can also add ‘leverage’ to your trades. This means multiplying your trade to increase the potential profits or losses.
New to leverage trading? Let’s use our Apple example again to explain. This time you buy an Apple CFD at $150, but you ‘leverage’ it by 2x. Your initial capital is $150, but you double it by borrowing money from the broker. Your position is now $300. If the stock goes up, you make twice the profit. But if it goes down, you lose twice as much.
In the Stryk app, we call this the ‘multiplier.’ It’s important that you use the multiplier function with caution.
What are the downsides of CFD trading?
All types of financial trading come with risk. However, CFD trading carries additional risk if you’re using leverage. You do not own the underlying product you choose to trade, so you have no claim towards it. You can lose all your capital, so ensure you are trading with money you can afford to lose.
CFDs may also have less regulation than traditional stocks. CFDs often have overnight financing charges that can stack up over time, so they may not be appropriate for long-term investors.
Are CFDs right for me?
Why not open a Stryk Demo account and try it out? You’ll get €1,000 demo cash so you can get a feel for the markets without risking real money.
When you’re ready to take it up a notch, you can switch to a real money account.