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How to learn CFD trading terminology?
Have you become interested in Contract For Differences (CFD) trading? Over the past few years, CFD trading has become popular in Kenya and across Africa generally, and it looks like it will continue to grow in popularity. When you start looking into trading, one of the first things you will notice is all the trader terminology. All these new trading terms can be a little daunting at first but don’t be intimidated. Below we have explained some of the most commonly used language and phrases in CFD trading.
What is CFD trading?
CFDs involve trading assets like fiat currencies, stocks, cryptos and forex. You do not own the asset you are trading; instead, you predict price trends and markets. Because this type of trading is based on forecasting a difference or trends in price, not simply on asset increases, you can potentially earn money when the price of your preferred asset either goes up or down.
What CFD terminology do I need to learn?
Like any language, there are many new terms to learn, but these are some of the most useful to help you get started in your trading journey.
The term leverage in trading refers to the capital borrowed when opening a position from your broker of choice. Using leverage means if you have minimal equity, it can be applied over multiples of your investment. When using leverage as an investment strategy, the rate will apply to both losses and profits, and the broker will, in effect, lend the amount to you as explained in this guide by Forbes. Leverage means you can start trading with a small beginning deposit. For example, 100:1 means $1,000 margin required = $100,000 notional value. Usually, brokers recommend that traders use a tool that mitigates risk, for example, stop-loss orders.
Future trading refers to agreeing on the price that an asset will be bought or sold on a future fixed date. For example, you can trade S&P 500 (the stock market index that measures the performance of 500 companies) through futures contracts. Trading futures was previously reserved for institutional traders. However, it is now possible to get into future trading with online brokers easily. For example, you can trade futures with INFINOX, an online broker, that offers lower fees and more leverage than traditional exchanges. Futures are a popular option if you are a beginner trader and trade CFDs with low margins and low trading costs.
Put simply, spread means the profit taken by the broker. Usually, when using a broker, they quote or offer their prices in the form of a spread. You will be presented an asset with the buy\offer price and the sell\bid prices; the difference between these two figures is the spread. The spread always refers to the difference in two rates. Usually, the tighter or smaller the spread, the better desirability of trade for you. Online trader platforms allow you to trade at competitive spreads.
These are some of the frequently used and helpful terms to begin your online trading journey, but it is a continual learning process. Remember, there is always risk involved, so do some research before you get started and develop your trading strategy.