CFD Trading Explained for 

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When you think of the term "CFD trading", what comes first into your mind? 

Stocks? Shares? Cryptocurrencies? Commodities? Commercial Transactions? 

As a matter of fact, trading major stock indexes is an incredibly popular trading 

We can trace stock exchanges back to the 1300's with money lending, business 
dealings, through to the 1800's with the incredibly interesting​ ​South Seas Bubble 
Burst​, right through until today. 

Today it has innovated into a modern-day dealing with the help of derivatives. 
Different forms of derivatives are being used by lots of traders every day and one of 
the most popular derivative forms of trading online is called an online CFD. 

CFD Trading Meaning 

CFD stands for “​Contract For Difference​”. 

CFD’s or “Contract for Difference” are a flexible way to trade on a wide range of 
financial markets by speculating on the fast-moving global market’s rising and 
falling prices of instruments such as shares, indices, and commodities online. 

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This is often an arrangement made in a futures contract where differences in a 

The contract stands for the deal itself. In detail, it’s the act of​ ​buying or selling a 
financial asset through a broker​. The difference is the price change that occurs 
between an opening and closing of trades. The price change is used to calculate 
profits and losses. 

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CFD Trading For Beginners 

In CFD trading you can still benefit from the movement in the price of an asset 
without having to buy the physical financial instrument. 

This gives you the benefits and risks of trading securities without actually owning 
them. This is quite favorable because of its easier method of settlement and 
reduced costs. 

With​ ​CFD's Trading​ you also are able to access leverage with your trading position. 

CFD's have a standard 2% margin requirement and as high as 20%. Not being 
bound by minimum amounts of capital or limited numbers of trades per day can 
also be a real upside. 

With CFD's many products are available even if the underlying market is closed 
allowing you to trade 24 hours a day, five days a week. 

Since you don’t own the underlying asset there is no stamp duty to pay. Whilst 
there are spreads and commissions to pay through your broker, it makes this form 
of trading very cost efficient. 

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Where are the Opportunities? 

CFD markets​ have reached a high-level of development and become very popular 
giving you the opportunity to make deals on a wide variety of underlying assets. 

CFD's give you the opportunity to trade against the share price movement without 
actually buying or selling physical shares and you can still ​make profits when 
markets are falling. 

Removing the need to trade through a stockbroker is now quick and accessible 
with CFDs. 

What is Index Trading? 

A stock index or​ ​stock market​ index is a measurement of a section of the stock 
market. It is a common tool for investors and financial managers to describe the 
market and also to compare the returns of specifics investments. 

A stock index is created from tracking a set of underlying stock prices for that 
market. For example; the Dow Jones tracks 30 large cap US stocks with each 
affecting the price of the overall Dow Jones Price. 

Below are some of the world's most popular stock index markets; 

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What are the Most Popular Index Markets? 

Dow Jones Industrial Average 

source: https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average 

Operator: 

S&P Dow Jones Indices 

Exchanges: 

New York Stock Exchange 

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NASDAQ 

Constituents: 

30 

Type: 

Large-cap 

Weighting Method: 

Price-weighted 

FTSE 100 Index 

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source: https://en.wikipedia.org/wiki/FTSE_100_Index 

Operator: 

FTSE Group 

Exchanges: 

London Stock Exchange 

Constituents: 

505 

Type: 

Large-cap 

Weighting method: 

Free-float capitalization-weighted 

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Russell 2000 

source: https://en.wikipedia.org/wiki/Russell_2000_Index 

Operator: 

FTSE Russell 

Exchanges: 

New York Stock Exchange 

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NASDAQ 

OTC Markets Group 

Constituents: 

1,959 

Type: 

Small Cap 

Weighting method: 

Free-float capitalization-weighted 

There are also other indices such as ​Eurostoxx 50, Topix, Nikkei 225, Shanghai 
Stock Exchange Composite Index, Dollar Basket, EU Stocks 50, Germany 30, US 
500, Wall Street​ and a lot more. You're probably thinking “Woaaah! There are a lot 
of indices!".  

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How Can You Trade Index Markets? 

The first thing you need when looking to trade these major markets is a broker you 
can trust and rely on. Whilst more and more brokers are beginning to add these 
markets into their trading lists, a lot of them are extremely expensive or do not let 
you trade with small lots, forcing you to risk large amounts of money. 

You want to be with a broker you trust, you can first practice trade with and then 
have the option of risking whatever amount you are comfortable with. 

Read about the best broker for this here. 

When trading indices, it is important for you to diversify your trading strategy. 

After all, we must always review events that may affect our trades such as 
economic reports, geopolitical news, and employment reports. 

When trading indices, if you think that the product value will go up, you can place a 
“BUY (bid)” trade or “Go long”. 

If you think the market will go down, then you can place a “SELL (Offer)” trade or 
“Go short”. 

As an illustration, the image below is an example of an index trading buy price and 
sell price. 

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If Nikkei 225 index stands at 1205; they may offer a buy price of 1204 and a sell price 
of 1206. The format should be 1204 / 1206. You can choose how much you would 
like to trade per point. 

If you decide to “BUY” £5 per point at 1206, for each point the Nikkei 225 rises, you 
will earn £5. 

From 1204/1206 to 1206/1208 = £5 x 2 = £10 Profit 

However, if it went down; 

From 1204/1206 to 1202/1204 = £5 x -2 = £-10 Loss. A loss would happen if you close 
your trade immediately. 

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If the Nikkei 225 decreased to 1198/1200, and you chose to close your position at 
this level, you will incur a loss of £-30 (£5 x -6 = £-30 Loss) 

Recap 

Leverage and position size plays a big role in trading indices. These will determine 
how much you make or lose per points move. 

Your trades entries and exits require​ ​technical and fundamental analysis​. Make 
sure you have an exit plan before entering the trade. 

It's important to realize that without proper control of emotions and knowledge of 
the system, not a single word would help you trade profitably. All trading involves 
risk. Losses can exceed deposits. 

“​Every trader has strengths and weakness. Some are good holders of 
winners, but may hold their losers a little too long. Others may cut 
their winners a little short, but are quick to take their losses. As long 
as you stick to your own style, you get the good and bad in your own 
approach.​” 

-Michael Marcus 

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