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What are CFDs and how do they work?

Making the decision to begin trading can be a daunting one. For the everyday beginner, the start of their trading career is a tightrope walk between risk and reward, so it’s important to start with a solid understanding of what exactly you are trading.

As one possible way in, CFD trading is one of the most popular ways to trade, with over 710,000 such traders in Australia alone.

But what is CFD trading and why is it becoming so popular? Standing for ‘contracts for difference’, CFD trading involves speculation on the rises and falls in prices of securities – for example, in stock shares.

Why so popular and why now?

For years, trading of all kinds has typically been reserved for the wealthiest among us, giving large amounts of money to hedge funds in the hope to become that little bit wealthier. However, the emergence of new technology has eroded the barriers to entry generally associated with trading. Mobile apps now enable you to trade from your phone, in the comfort of your own home, with reduced commission rates and often with investments as little as $1.

So, we can trade more easily, but is it safe? One benefit of CFD trading is that you can be successful even when trading on markets that are in poorer shape and come out with profit when the price falls. It makes CFD trading an attractive option in an era of widespread uncertainty thanks to major upheaval such as the Covid-19 pandemic.

What exactly can you trade with CFDs?

CFDs allow you to trade on a wide range of assets, from valuable commodities to foreign exchange and much more besides. Your portfolio could include investments in major corporations alongside speculation on even something like the future value of rice. This flexibility also helps to explain the surge in popularity of CFD trading. It seems that the age-old warning not to put all of your eggs in one basket is as relevant today as ever before.

What now?

With so much potential in trading CFDs, you might want to pick up your phone and get started straight away. We certainly won’t discourage you but it’s important to remember the most important principles when it comes to trading. Make sure to do your own research before you start any form of trading so that you can feel confident in your decision-making – and only ever invest what you can afford to lose, as there is never a guarantee of success in such fields.

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