February 19, 2019 | 02:40 AM


23.06.2018The new investment world: Online CFD trading

Learn about the brave new world of CFD trading in 2018 with Fat Cat

In decades gone by, there were only a few ways in which people could build a stocks and shares portfolio. Many people who wanted to invest in stocks found themselves a reputable broker who was able to link them up to a specific sale, while others may have invested in a fund that allowed them to access a whole range of different assets.

But in the modern age, that’s all changed. Now, it’s possible to trade on the stock market, the commodities market and even dip a toe into the currency world without owning the asset itself. That’s down to the growth in derivatives, or financial products which track a market and operate in largely the same way as them. And with the growth in this market coinciding with the popularity of the internet, contracts for difference – or CFDs – have become one of the main ways that wider derivative stock market access is now possible. This blog post will explore just exactly what a CFD is, how it works and why it could well represent the future of investment.

What is a CFD?

A CFD is a financial instrument which gives traders the chance to speculate on the outcome of a particular market movement. A person who trades a stock CFD, for example, will specify whether they think it will rise or fall in value, and then will benefit or lose accordingly. Once a trade has been placed, a range of functions and tools which are common in the stock broking world then also become available to the CFD trader. These include stop losses, which stipulate that an open position should be closed as soon as a certain level of profit or loss has been reached, and more. 

How does online CFD trading work? 

CFDs are traded mostly online through brokers who specialize in that service. Usually, a trader who wants to sign up to a CFD broker will have to provide a range of identification documents in order to be able to use the service, but otherwise the barriers to entry are low. A number of innovations focusing on improving the user experience of CFD traders have also emerged in recent years, including the rise in social trading whereby users can have their own portfolio mimic that of a more experienced trader, and link their fortunes.

What can be traded?

This, perhaps, is the area in which CFDs really come into their own. There are many different types of CFD-based instruments out there. People who want to trade on the stock market, for example, can select an index to track, while those who want to speculate on the value of a specific company’s stock can do that too. And as the CFD market is margin-based, it’s also possible for a trader to make a higher profit compared to standard stock market trading thanks to the way the trade is leveraged.

Is CFD trading safe?

“Safety”, of course, has different definitions for different people. As with almost all investments, there is an inherent level of risk involved – and traders who use these platforms may well not get back the entirety of their initial investment. However, it is “safe” in the sense that it’s a regulated activity and providers have to follow certain rules in order to stay operational.

In Australia, CFD brokers are regulated. An Australian financial services license (or AFSL) is issued to reputable brokers, so traders should always look out for these. ASIC – the Australian Securities and Investment Commission – does from time to time issue lists of brokers operating in Australia who do not have the required licenses, too.

The bottom line

The world of trading is changing, and it’s now more common than ever to see people trade online. While real stocks and shares can be traded through the powerful medium of the internet, it is also the case that traders who want to trade without owning the underlying asset are now able to do so through the flexible world of the CFD.

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