CFD trading stands for Contract for Difference trading, a popular form of derivative trading. It allows traders to speculate on the price movements of various financial instruments, such as stocks, commodities, indices and currencies, without owning the underlying assets. Here’s a simple overview of how CFD trading works, its key features and associated risks.

How CFD trading Works

In CFD trading, you speculate on an instrument’s price movements, predicting whether its price will rise or fall without actually owning it. To start, you open a position based on your market expectation: you go long (buy) if you think the price will rise, or you go short (sell) if you think the price will fall.

CFDs are traded on margin, meaning you only need to deposit a small percentage of the full trade value. This use of leverage allows you to amplify both potential profits and losses. The profit or loss is calculated based on the difference between your position’s opening and closing prices, multiplied by the number of CFD units you hold. If the market moves in your favor, you make a profit. If it moves against you, you incur a loss. This mechanism lets traders engage with the market using relatively small amounts of capital while still having the opportunity to benefit from significant price movements.

There are five types of CFD trading instruments available at Doto:

• Foreign exchange (forex)
• Company stocks
• Stock market indices
• Commodities
• Cryptocurrencies

You can check the full list on the Doto website.

Key features of CFD trading

1. Leverage. With leverage, you can trade larger positions with a smaller amount of capital. However, while leverage can increase your returns, it can also increase your losses.
2. Market access. CFDs provide access to a wide range of instruments from a single trading platform, including stocks, commodities, indices and forex.
3. Flexibility. With CFDs, you can profit from both rising and falling markets by going long or short.
4. No ownership. You do not own the underlying asset, which means you can avoid certain costs and restrictions associated with ownership.

Risks of CFD trading

1. Leverage risk. Leverage can magnify losses as well as gains. Small market movements can have a large impact on your trading account.
2. Market Risk. Prices can be volatile, and sudden market movements can result in significant losses.
3. Costs. CFD trading can involve costs such as spreads, commissions, and overnight financing charges, which can affect your overall profitability.