CFD Trading – A Comprehensive Beginners Guide. We have listed, rated, and reviewed all the must-know facts, leading CFD Trading Brokers, and Best Trading Platforms all Beginner traders must know and consider before signing up.
In this in-depth write-up you will learn:
- What is Contract For Difference Trading and how does it work – Explained.
- CFD Trading Strategies – Golden Rules.
- Risk Management in Trading.
- How does Trading Signals Work?
- A Trading Glossary – Basic Terms and Vocabulary.
- Trading Terms and Conditions.
- Trading Examples and Steps.
- Trading Regulations, Legality, and Restrictions.
and much, MUCH more!
Let’s jump in…
CFD Trading – A Definition
A contract for difference or CFD is a contract between a buyer and a seller that states that the buyer has to pay the seller the difference between the current value of an asset and its value at contract time. Contract for Difference trading will allow traders and investors to profit from price movements without owning the underlying assets.
CFD Trading Beginners Guide – 25 Key Points Quick Overview
- ☑️Contract for Differences CFD – Overview
- ☑️CFD Trading for Beginners – A Breakdown
- ☑️CFD Trading – An Example
- ☑️Top 3 CFD Brokers for CFD Trading
- ☑️CFDs – Countries of Trade
- ☑️CFDs vs. Forex – Learn the Difference
- ☑️CFDs vs Stocks – What’s Best?
- ☑️CFDs vs Options – An Overview
- ☑️CFDs vs. Shares – Which is the Option for you?
- ☑️CFDs vs EFTs – Explained
- ☑️CFDs vs Futures – Similarities and Differences
- ☑️CFDs vs Spread Betting – Need to Know
- ☑️CFDs Long vs Short Market Positions – Explained
- ☑️How Does Leverage Affect CFD Trading? – Explained
- ☑️Calculation of CFDs Profit / Loss
- ☑️Types of CFD Leverages
- ☑️Types of CFD Accounts
- ☑️CFD Platforms in South Africa
- ☑️How to Become a Successful CFD Trader
- ☑️CFD Analysis
- ☑️Top 3 Trading Strategies for Beginners
- ☑️Advantages and Disadvantages of Contract for Difference Trading
- ☑️CFDs Pros and Cons
- ☑️In Conclusion
- ☑️Frequently Asked Questions
Overview
A contract for difference, or CFD, is a contract between a buyer and a seller in which the buyer pays the seller the difference between an asset’s current value and its value at contract time. This type of trading allows traders and investors to profit from price movements without owning the underlying assets.
The value of a CFD contract only considers the price change between the trade entry and exit.
Contract for difference trading enables the trader to speculate on over-the-counter (OTC) markets in underlying financial assets (instruments) such as shares, indices, commodities, currencies, and treasuries.
CFD Trading for Beginners – A Breakdown
Trading CFDs allows a trader to profit if a market moves up or down. It is a flexible alternative to traditional trading, giving a trader the flexibility to trade on the price of an asset rather than buying the asset itself.
By not owning the underlying asset, the trader can profit from underlying markets rising in price as well as those falling in price.
With CFDs, traders are allowed to trade from one trading account on the prices of different underlying assets, like shares, currencies, indices, and commodities like oil or gold. Each CFD has a buy price (ask or offer price) and sell price (bid price), based on the price of the underlying asset.
If there is an expectation that the price of the underlying asset will rise, the trader will buy. This is called “going long” (also referred to as “a long trade” or a “long position”), meaning buying a CFD to sell at a later stage.
Key Considerations for Choosing a CFD Broker in South Africa
Consideration | Details |
🛡️Regulation | Look for brokers regulated by FSCA for extra protection. |
💰Spreads & Fees | Compare spreads and commissions between brokers. |
📱Platform & Tools | Choose brokers with user-friendly platforms like MetaTrader 4/5 or cTrader. |
💳Payment Methods | Ensure availability of South African payment options (e.g., EFT, PayPal, credit/debit cards). |
📞Customer Support | 24/7 support and responsive communication are essential for South African traders. |
⚖️Leverage | Check the leverage options to ensure they match your risk tolerance. |
📲Mobile Accessibility | Ensure the broker’s platform is mobile-friendly. |
CFD Trading Strategies for Beginners
CFD trading can seem complex at first, but beginners can build confidence by adopting simple and effective strategies. Common strategies include trend following, range trading, and news trading. It is very important to practice strategies using demo accounts before trading with real money.
Steps to Start Trading CFDs in South Africa
1. Choose a Secure CFD Broker
- Regulatory Compliance: Ensure the broker is regulated by the FSCA (Financial Sector Conduct Authority) for added security.
- Security Features: Look for SSL encryption and two-factor authentication (2FA).
- Reputation: Choose a broker with positive reviews and a solid reputation in the market.
2. Account Setup and Verification
- Sign Up: Provide your personal information (name, email, phone number).
- Verification: Submit proof of identity (e.g., passport or driver’s license) and proof of address (e.g., utility bill).
- Choose Account Type: Select an account type that suits your trading style and investment goals.
3. Funding Your Account
- Payment Methods: Use local payment options such as bank transfers, credit/debit cards, and payment platforms like PayPal or Zapper.
- Minimum Deposit: Check the broker’s minimum deposit requirement.
Top 3 CFD Brokers for Trading
🔎 Broker | 📌 CFD Trading | ⚙️ Broker Features | 🏛️Regulation | 🚀 Open an Account |
🥇 AvaTrade | ✅ Yes | - User-friendly platforms (MT4, MT5, AvaSocial) - Wide range of CFDs - AvaProtect feature for risk management | FSCA, ASIC, CySEC, FSA, and more | 👉 Click Here |
🥈 FXCM | ✅ Yes | - User-friendly interface - Extensive educational resources - Wide range of instruments | FSCA | 👉 Click Here |
🥉 HFM | ✅ Yes | - Advanced trading tools - Competitive spreads - Excellent customer support | FSCA | 👉 Click Here |
CFDs vs. Forex – Learn the Difference
The main difference between CFD and Forex trading is that Forex offers pure currency trading whereas CFD trading will involve different types of contracts covering a diverse set of markets. This diverse set of markets includes Indices, Energy, and Metals.
🔎 Properties | 🥇 CFDs | 🥈 Forex |
✅ Ownership | ❌ No | ❌ No |
📈 Leverage | ✅ Yes | ✅ Yes |
🔁 Go Long and Short | ✅ Yes | ✅ Yes |
📊 Range of Markets | Multiple markets | Multiple markets |
💰 Costs of trading | Spread & Rollover | Fees & Deposits |
☑️ Dividends | ✅ Yes | ✅ Yes |
📝 Voting Rights | ❌ No | ✅ Yes |
CFDs vs Stocks – What’s Best?
When it comes to CFDs and Stocks, the major differences are leverage and ownership. When a trader buys stocks they take ownership of the shares. By trading CFDs, traders can speculate on the price of a security without owning the underlying asset.
🔎 Properties | 🥇 CFDs | 🥈 Stocks |
✅ Ownership | ❌ No | ✔️ Yes |
📈 Leverage | ✔️ Yes | ❌ No |
🔁 Go Long and Short | ✔️ Yes | ✔️ Yes |
📊 Range of Markets | Multiple markets | Multiple markets |
💰 Costs of trading | Spread & Rollover | Commission |
☑️ Dividends | ✔️ Yes | ✔️ Yes |
📝 Voting Rights | ❌ No | ✔️ Yes |
CFDs vs Options – An Overview
Options have a non-binding expiry date allowing traders to become the owner of the asset. Options trading involves limited risks and has low trading costs. On the other hand, CFDs have no expiry date. Traders can choose from a wide range of markets and use leverage. CFDs are also much simpler instruments to understand, whereas options can be more complex.
🔎 Properties | 🥇 CFDs | 🥈 Options |
✅ Ownership | ❌ No | ❌ No |
📈 Leverage | ✔️ Yes | ✔️ Yes |
🔁 Go Long and Short | ✔️ Yes | ✔️ Yes |
📊 Range of Markets | Multiple markets | Range Bound |
💰 Costs of trading | Spread & Rollover | Commission |
☑️ Dividends | ✔️ Yes | ✔️ Yes |
CFDs vs. Shares – Which is the Option for you?
Trading CFDs will allow traders to go short. This means traders can speculate on the price of the stock to go down. On the other hand, Share dealing has only one direction, long. CFDs in turn allow for the use of leverage and offer access to a wider selection of markets, including indices, commodities, forex, and futures.
🔎 Properties | 🥇 CFDs | 🥈 Shares |
✅ Ownership | ❌ No | ✔️ Yes |
📈 Leverage | ✔️ Yes | ✔️ Yes |
🔁 Go Long and Short | ✔️ Yes | ✔️ Yes |
📊 Range of Markets | Multiple markets | Multiple markets |
💰 Costs of trading | Spread & Rollover | Commission |
📌 Trading hours | 24/5 | NYSE Hours |
☑️ Dividends | ✔️ Yes | ✔️ Yes |
CFDs vs EFTs – Explained
CFDs and ETFs are both popular products for trading on the financial markets. CFDs are financial derivative products that will allow traders to speculate on the price movement of an underlying asset whereas ETFs are a type of investment fund and exchange-traded product that will track an underlying basket of assets.
🔎 Properties | 🥇 CFDs | 🥈 ETFs |
✅ Ownership | ❌ No | Divided |
📈 Leverage | ✔️ Yes | ✔️ Yes |
🔁 Go Long and Short | ✔️ Yes | ✔️ Yes |
📊 Range of Markets | Multiple markets | Multiple markets |
💰 Costs of trading | Spread & Rollover | Management Fee |
☑️ Dividends | ✔️ Yes | ✔️ Yes |
CFDs vs Futures – Similarities and Differences
CFDs and Futures are both derivatives. This means when they are traded, the trader will not own the underlying asset. However, there are many differences in how CFDs and futures are traded. CFDs will deal with movements in markets whereas Futures will involve an agreement to pay a fixed price on a fixed date for a particular asset.
🔎 Properties | 🥇 CFDs | 🥈 Futures |
✅ Ownership | ❌ No | ✔️ Yes |
📈 Leverage | ✔️ Yes | ✔️ Yes |
🔁 Go Long and Short | ✔️ Yes | ✔️ Yes |
📊 Range of Markets | Multiple markets | Multiple markets |
💰 Costs of trading | Spread & Rollover | Commission |
📌 Trading hours | 24/5 | 24/5 |
☑️ Dividends | ✔️ Yes | ✔️ Yes |
CFDs vs Spread Betting – Need to Know
The term Spread Betting refers to a speculative bet being placed on the price movements of an underlying instrument without actually owning it. CFDs on the other hand are short-term leveraged derivative contracts that will track the value of select underlying instruments and pay it off accordingly.
🥇 CFDs | 🥈 Spread Betting |
CFDs vs EFTs | DMA on Shares |
No commission | Losses can be offset |
Deal on rising and falling markets | Deal on rising and falling markets |
No stamp duty | No stamp duty |
24-hour dealing | 24-hour dealing |
CFDs Long vs Short Market Positions – Explained
CFDs Long Position
A long position means the trader will expect the value of the security or asset in question to increase.
For example:
The trader takes a position in stock ABC trades at $10 and the trader is expecting an increase. The trader has $10,000 and the initial margin is 10%, it’s the equivalent of purchasing 10,000 shares. Let’s assume that in two weeks the stock price increases to $5.10 at the CFD close-out. This means the trader will have profited by $1,000.
Please keep in mind – this is only an example.
CFDs Short Position
In the case of a short position, the trader expects the value of the security, index, commodity, or currency in question to decrease.
For example:
The ABC stock trades at $10 and a decrease is expected. If the investment is $10,000 of funding and the margin is initially 10%, to gain a profit the trader will need to sell the shares and then re-buy the shares later on. The trader will sell 10,000 shares.
Assuming the stock decreases to $9.75 in a couple of weeks, the 10% is covered and the stock has depreciated. This time the trader will make $2,500 in profit.
Please keep in mind – this is only an example.
CFDs Long and Short Positions – The Difference
The difference between the long and short positions lies in the interest rate that has to be subtracted or added.
How Does Leverage Affect Trading CFD’s? – Explained
Many traders choose to trade CFDs because of the leverage feature. Financial leverage in Contract for Difference Trading refers to an investment strategy that will allow them to gain exposure to the financial markets with a smaller amount of upfront capital, known as margin, required. This is also referred to as margin trading.
Calculation of CFDs Profit / Loss
Multiply the total number of contracts by the value of each contract and then multiply the first answer by the difference in points between the closing and opening prices of the contract.
Thus,
Profit or loss
=
(no. of contracts x value of each contract)
x (closing price – opening price)
To get the full picture, spread costs must be factored in, as well as other applicable fees or charges.
Types of CFD Leverages
Financial leverage in Trading refers to an investment strategy that will allow them to gain exposure to the financial markets with a smaller amount of upfront capital, known as margin, required. This is also referred to as margin trading.
Markets covered by CFDs include:
- ✅ Global stock CFDs
- ✅ Stock index CFDs
- ✅ Forex CFDs
- ✅ Industry sector CFDs
- ✅ Commodity CFDs
And finally, Metals and energy CFDs. This includes gold, silver, oil, natural gas, and uranium.
Types of CFD Accounts
The type of CFD accounts on offer will depend on the Broker or Service provider chosen. Generally, modern trading accounts are made available for desktop and mobile devices, and traders can access the markets via a selection of platforms, including leaders like MetaTrader4 and MetaTrader5.
CFD Platforms in South Africa
CFDs are popular financial instruments that are key components of a trader’s portfolio. Therefore, it comes as no surprise that multiple leading Forex Brokers offer the option of CFD trading to South African Investors.
Top providers in South Africa include:
- ✅ AvaTrade
- ✅ Pepperstone
- ✅ XTB
- ✅ FXCM
- ✅ FxPro
and many more! With a low initial investment, the ability to go long or short, and leveraged trading are only some of the reasons why this type of trading has become a popular choice amongst SA traders. It’s important to remember that a Contract for difference trading is unlike other types of trading. The profits and losses of CFDs will fluctuate based on price movements, and it is important to manage this risk carefully.
What makes for a leading CFD Platform in South Africa includes the following:
- ✅ Reliability of the Trading Platform
- ✅ Competitive Pricing
- ✅ Wide Range of Markets
- ✅ Excellent Customer Support
and last but the most important factor, regulation by top-tier authorities.
How to Become a Successful CFD Trader
CFD trading has become an increasingly popular investment style. Becoming a successful trader will take hard work, determination, and a sensible and reasonable approach.
10 Key Basics – How to Trade CFDs Successfully
1. Be Informed
One of the most common mistakes new traders make is going into trading uninformed. Reading a few topic-related blog posts will not lead to success. The key to being successful at trading is in self-education obtained beforehand. Sign up with a platform that offers a demo account to practice trades before using a single cent. Remember, Learning to trade is also an ongoing process.
2. Find the Right Trading Platform
The platform a trader selects is essential for many reasons. Traders should look at all the costs involved with the trades, including the ease of withdrawing funds. See how secure the platform is and if the platform offers friendly help and advice. Many brokers offer a wide range of markets for cfd options trading, articles, and tutorial videos.
3. Have a Trading Plan
Part of self-education in trading is creating a trading plan. It will direct trades and help the trader to decide what to do at what time. A trading plan will cover everything from what markets to trade, stop losses in place, and how to protect capital. A trading plan will develop alongside the traders’ trading experience.
4. Have Patience
Traders who go all into CFDs trading too fast will end up blowing their capital and have nothing left to trade. Have patience and take it slow. Start by making gradual small gains that add up.
5. Diversify
As a trader gets the hang of an asset, they can start to carefully diversify. If one market takes a big hit, the trader will not feel the blow as much. Learn about new assets and markets and follow a trading plan.
6. Don’t Get Greedy
Successful traders appreciate the dangers when it comes to trading, and that includes getting too greedy. Successful trading is about balance, not risk-taking. Slow and Steady will win the race.
7. Choose a Trading Style
Trading styles are defined by time horizons and the length of time that positions are held. A choice of style will depend largely on the traders’ personalities, their attention span, and how intense they want their trading sessions to be.
8. Use stop-loss orders
Traders must make sure to limit their downside by making use of stop-loss orders.
9. Use a Demo Account
As with any form of trading, a Demo Account is a must. A demo account allows the trader to practice trading in simulated live trading conditions – a risk-free environment.
10. Cutting losses
Do not chase losses! Remove the emotional element by sticking to the strategy. Set rules and stick to them.
CFD Analysis
Technical analysis in contracts for difference trading refers to the study of historical data and charts in order for the trader to make educated trades. Technical Analysis also represents the basis for various automated trading solutions. Traders should note, however, that past performance is not always a reliable guide to future performance.
There are 3 basic types of trends:
- ✅ Short term
- ✅ Intermediate-term
- ✅ Long term
Firstly, the trader will need to decide what type of trader/investor they are and whether or not they wish to hold positions for a long time or buy and sell fast. This decision will determine the trading charts used.
Top 3 CFD Trading Strategies for Beginners
Traders need to apply sound risk and money management rules to better protect their trading capital. This can be done by following a solid trading strategy.
1. News trading
Generally, when a trader makes use of CFDs, they use an intra-day, scalping, or day trading strategy. Traders do not have to pay any fees to keep their trading positions open overnight but, these strategies do require a lot of time, dedication, and focus. Intra-day and day trading strategies mean that the trader will open and close a position within the same trading session.
One of the strategies that works very well with CFDs is known as scalping. Scalping is ideal for trading the news.
To be successful with news trading, the trader must follow a comprehensive economic and financial calendar. The trader must be aware of upcoming events or statistics that could affect the underlying asset being traded.
2. Pair trading
Pair trading is usually used with CFDs on stocks.
However, pair trading can also be used with 2 ETFs, currencies, commodities, etc. The main advantage of pair trading is that it can be used with high or low market volatility, as the market’s direction is not that important to the success of this strategy.
This strategy works when the trader invests in 2 different CFDs that belong to the same industry with one long position and one short position.
3. Hedging
A forex hedge refers to a transaction that is used to protect an existing or anticipated position from an unwanted move in exchange rates. Hedges are used by a broad range of market participants, including in CFD trading.
Advantages and Disadvantages of CFD Trading
CFD trading, as with any offering, comes with its fair share of advantages and disadvantages. Here is a breakdown of both.
Advantages
CFD traders can speculate on both rising and falling markets, which in turn offer them more trading opportunities. Profit can be made from buying or selling Contracts for Difference on a wide range of financial instruments. CFD traders can go both long and short, as well as buy or sell their positions.
From a single trading account, traders will have access to Contracts for Differences on forex, shares, indices, spot metals, commodities, bonds, and ETFs.
Disadvantages
Why CFD traders lose money. As with any form of trade, there are numerous benefits to contracting for different trading. However, an investor must ensure they are fully aware of all the risks involved when trading financial derivatives. Margin trading will enable investors to open a CFD position on the market with a smaller initial deposit. However, a smaller initial deposit will also carry a certain level of risk.
If a trader enters the market with little capital yet overleveraged, even the smallest of price movements can potentially wipe out their entire investment.
Additionally, if positions are left open for extended periods without efficient management, costs can accumulate over time. Investors should be aware of additional costs, such as overnight swaps.
CFDs Pros and Cons
✅ Pros | ❌ Cons |
Leverage | Overnight Fees |
No Stamp Duty | Lack of Ownership |
Conclusion
Overall, the Contract for difference trading is suitable for both novice and established investors alike. As with any form of trading, CFDs do come with a certain level of risk.
Frequently Asked Questions
What is CFD in trading?
Contract for difference is a popular form of derivative trading that enables a trader to speculate on rising and falling prices of fast-moving market instruments.
Is CFD Trading safe?
Yes. CFD trading is considered safe but does carry a level of risk similar to any financial investment.
Is CFD trading profitable?
Yes, CFD trading does have the potential to be profitable.
Is CFD trading Halal?
No. CFDs are not Halal. CFDs are Haram in Islam as the trader does not own the asset for the financial transaction.
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