Trading through contracts for difference (CFDs) can be a great way to diversify your investment portfolio. There are many benefits to CFD trading, but like with any form of trading, it does come with its risks. This means it’s essential to find the best CFD trading platform for you.
In this article, we’ll explain how CFD trading works and how to find the best CFD broker, so you can rest assured you’re using the right platform for you and your trading style.
What is CFD trading?
You can trade CFDs in various markets, including stocks, indices, commodities, and foreign exchange (forex). Unlike traditional trading, CFD trading doesn’t involve ownership of the underlying asset. The exchange takes place based on the speculation of price movements in the market.
The CFD is a contract between the trader and the CFD broker or trading platform, acting as an agreement between the two parties, to pay the difference in price between opening and closing the contract.
There is not a physical exchange for CFD trading, and instead it is conducted through online trading platforms. The value of CFDs, and the supply and demand, is determined by a network of CFD brokers.
What makes a good CFD trading platform?
There are certain things you can look out for when choosing a CFD trading platform, which can make one stand out amongst the rest. Before opening a trading account, here are some of the benefits that the trading platform can offer you:
- Leverage
Most CFD trading platforms offer leverage trading. This allows greater exposure to the market, with lesser amount of capital. The rest is essentially borrowed from the CFD broker. Leveraged trading magnifies your position, and is reflected in both your profits and losses.
CFD trading platforms work in terms of leverage ratios, and you should understand the ratios offered by your chosen platform, beforehand. The best trading platforms will have reasonable leverage ratios, and reflect your position in relation to the capital deposited. For instance, a leverage ratio of 100:1 would mean that to trade £100,000 of an asset, £1,000 would be required.
- Risk Management Tools
Risk management should be a priority in your trading strategy, evaluating the maximum losses you are willing to take, or the target profit you wish to achieve.
CFD trading platforms can offer you risk management tools and trading orders to help with this. For example, a Stop Loss or Limit Order allows you to set a specific price when an instruction to buy or sell will be triggered. A Stop Loss works on the basis of protecting your profit once it reaches the desired amount, whereas a Limit Order aims to minimise the losses incurred, and exiting the market accordingly.
It is therefore worth checking which of these tools (or more) that your chosen CFD trading platform has to offer.
- Free Demo Account
Practice makes perfect, and the same can be applied to CFD trading. If you’re new to the world of trading and investing, then the best platform for you will offer the chance to test your strategy without using any of your real capital.
A free demo account mirrors the movement of the underlying market, and so allows traders to grow their knowledge of the market as well as their trading strategy. If your techniques are successful, then you can enter the real market, with real money, in a better-informed decision.
- Accessibility to markets and assets
Some of the best CFD trading platforms will have a wide range of instruments to trade in, as well access to the global markets — all from one trading account. With a variety of assets, you can strive for a more diverse investment portfolio.
There are many benefits to CFD trading including the use of leverage and risk management tools, as well as the ability to speculate on both rising and falling markets. As with any investment, it’s important to carry out extensive research of the financial markets, as well as the trading platform, before opening a trading account.
