Are you looking for small investments with a low starting capital and don’t know where to start, given how vast the trading world is and the wide array of products available? Why not consider CFDs?
What Are CFDs?
A contract for difference (CFD) is a typically short-term contract between the investor and the broker. At the end of the contract, both parties exchange the difference between the opening price and the closing price. CFDs can involve Forex, indices, stocks, commodities, ETFs, and bonds.
This type of trading allows you to start trading with a small initial capital, and also to trade on margin, which means you have access to leverage. You can then position yourself in an investment without holding the equivalent value of the transaction in capital. Thus, your capital isn’t tied up, allowing you to consider other investments.
Returns on investment can therefore be substantial, but trading on margin also means that losses can exceed the initial investment. It is crucial to choose your CFD wisely, develop a trading plan, and assess the risk before investing.
Let’s take an example. If you want to buy 1,000 shares with your CFDs, you might only have to deposit 5% of the total value instead of 100%. Suppose the share is priced at €1; you would only have to deposit €50 (5% of 1,000 = €50) plus the commission, instead of €1,000.
Choosing the Product
The choice of CFD is sometimes relative and will largely depend on your plan. What are your product preferences? Do you prefer investing in cryptocurrencies? Stocks in a company? Or commodities? Do you prefer to invest long or short?
No matter what, keep in mind that it is possible to estimate the loss or gain of a CFD position with a simple calculation: CFD Loss/Profit Calculation = (position size * value per point) * (closing price – opening price).
Moreover, don’t hesitate to open a demo account as more and more brokers are offering them. It will help you establish your plan, learn from your mistakes, and limit losses in case of mishaps.
