Is CFD Trading the Right Style of Trading For You?

Whats Does CFD Trading Involve?

CFD, or Cost for Differance, is a type of trading that involves predicting the behaviour of a base asset over a specific time frame. It’s a derivative trading that enables the trader to gain potential profit through speculation, allowing you to open a contract for difference in price of an asset based on the falling or rising prices of global financial products or markets such as currencies, indices, shares, commodities, and treasuries. What makes CFD trading popular is that it allows the trader to profit regardless of the direction of prices in the financial markets.

A CFD contract is normally between a trader and broker and derives its value from the difference between the value of the underlying asset when it was purchased (or sold) and when it is sold (or bought). A trader can either go long (buy) or go short (sell). If a trader decides to go short on a CFD for 50 shares to the value of $500 ($10 per share), they would be selling that pair with a view to buying them back after the CFD has ended in their favour. So, the trader has predicted that the price will drop by the end of the CFD contract period. If they’re correct and they drop to $8, the trader will be ‘in the money’ by $2 x 50 = $100. This is because they will virtually buy back the shares for the lower price which is when they realise the profit value. In short, with CFDs the profit is in the difference, as demonstrated in the above example. Whichever way the trader predicts, the profit or losses are proportional to the difference.

Leverage and Margin

A CFD is what is known as a derivative financial product because its value is tied to, or derived from, the value of a base asset but not in the actual ownership of that asset. It’s also a leveraged product meaning that only a small margin or deposit (often 5%) is required to place a trade for a much larger amount. Now, in the above example the trader did not have to actually pay the full value of the trade because it is a leveraged product. At 5% the trader would only have had to pay $25 to be exposed to a $500 trade. So they would have profited by $100 plus their original deposit of $25 which equates to $125 for a small £25 outlay. That is the beauty of leverage. But it’s important to take note that there is a potential downside to leverage, which we’ll look at below.

The Dangers of Margin Closeout

The same mechanism that can amplify the financial returns of a small investment can also amplify the losses. What this means is that if the above example went against the trader and the shares increased from $10 to $12, the trader would be at a loss of $2 x 50 = $100 + $25= $125. This example may not seem such an extreme loss until you increase the margin and trade value so that the 5% margin is actually $500. The trade would have been worth $10,000 and the loss $2500! If a trader’s account drops below a predetermined threshold they could face what’s called a ‘Margin Closeout’, where all of the open positions belonging to that account are arbitrarily closed at the current value, regardless of whether that puts them at a profit or a loss. This is done to safeguard the broker and the trader, since losses can be incurred rapidly particularly when there are multiple leveraged products being traded at the same time.

Can I Make Substantial Profits Trading CFDs?

It’s possible to make a decent and even substantial amount of money trading CFDs, but that doesn’t mean it’s for everyone, or that it will yield instant gratification. It’s important to fully understand how CFD trading works before attempting to start live trading to minimise your chances of a loss. Although you only need to invest a deposit, typically 5%, due to it being a leveraged product, as well as potential to make good profit, you can just as easily stand to lose more than your deposit if the trade moves against you. This is something that needs to be taken into careful consideration if thinking about whether CFD trading is right for you. Ask yourself if you have the patience and self control to be able to trade responsibly, and whether you can afford financially to withstand making a loss.

How Do I Know if CFD Trading Is Right For Me?

If you’ve come this far without being put of by the risks then CFD trading could well be right for you. As you’re only required to put forward a small deposit (as we’ve already discussed), this may appeal to those who don’t have don’t have a huge amount to start with. However, due to the high risk factor, I actually wouldn’t recommend CFD trading to someone in this position. CFD trading is best suited to a seasoned trader, who is confident in their abilities to make rational and well placed bets, with the foresight not to bet too high when there is an increased risk of loss. It is not for the flighty or impulsive trader. It would be sensible to use an existing source of savings or income to place bets, increasing the ‘pot’ as you profit, so that you’re never putting your stable income or assets in danger should you make a loss. CFD trading can certainly be a lucrative and rewarding, but it’s important to decipher whether or not you posses the traits to make it successful.

How to Start Trading CFDs Safely

The best way to approach CFD trading is rationally, and with a good understanding of both the positives and the pitfalls. Ensure that you understand the risks involved, and consider whether it’s worth seeking advice prior to starting from an independant financial advisor. Start by betting small, and never invest more than you can afford to lose. As well as this, finding the right online broker is very important when considering a career in CFD trading. Never be swayed by claims of virtually risk-free profit but look closer for a reputable and well established online broker with existing presence in the market place.

5 Things to do When You Pay off a Debt

First off, congratulations; it is a huge accomplishment to pay off a debt.  You feel the weight off of your shoulders and get rid of the feeling that you are continuing to sink deeper into debt.  Now that you have tackled this obstacle it is time to stay disciplined and continue on the path of financial freedom away from debt.  Once your debt is gone there are a few next steps to stay ahead of the game.

Check Your Credit Report & Score

Getting out of debt is a glorious feeling, it’s easy to get caught up in the moment and start spending that discretionary income again. To quash that urge you should first check your credit score to see how much it improved since paying off that debt. If you are unfamiliar with score, you can see what a good score is here http://aaacreditguide.com/credit-scores/what-is-a-good-credit-score/.

Figure Next Financial Steps

The next move is to figure out what your next financial move is.  Is there more you need to pay off, do you need to start setting up a savings account for the extra money, or maybe you need to create a budget to curb spending going forward in order to not repeat previous mistakes.  Whatever you do, make sure saving is high on the list.

Move onto the Next One

If one debt is down, it is time to move onto the next until they are all paid off.  Try the next smallest balance to feel even more accomplishment, or try and tackle the debt with the largest interest rate so you can apply more towards principle and get rid of it.

Stash More Away for Rainy Day

Experts say that you should have between three and six months of living expenses put away in case of a job loss or a large unexpected repair such as your car or home appliance, so if you have not started to save, now is the time.

Save for Next Purchase

The trick to staying out of debt is to not continue to make unnecessary purchases, and to only spend what you can afford, so if there is an upcoming purchase that you want to make, now is the time to start saving, whether it is for a new car, home down payment, or even planning the next family vacation.

 

Creating a Diversified Portfolio

I see advertisements and news articles galore on robo-advisors popping up everywhere I look. Don’t get me wrong, I find these services to be much more cost efficient than the traditional financial advisors. Companies like Edward Jones still charge excessive investment and administrative fees so that they can cover their expensive overhead. Brick and mortar investment advisories have rent, utilities, and employees that they need to pay, and after all of that they still want to turn a decent profit. You, as the investor, are paying for that overhead. We as a society need to understand that creating a diversified portfolio with a risk tolerance comparable to your years until retirement, and that nothing more, or less, is needed.

First and foremost, a general rule of thumb is to limit your bond investing to your age less 10 points. So if you are 30 years of age, you should be 20% invested in bonds. The remainder of your portfolio should fall into equities! Now I am not saying you need to invest 80% into Apple stock, rather, you should diversify amongst a basket of equities.

Low cost mutual and index funds are usually the way to invest. Notice I said “low cost”. Index funds cover a wide variety of industries and stocks, some domestic, some international, and hopefully some that pay a healthy dividend as well. You want a high performing fund that takes as little off the top as possible. I generally try and stay within 0.5% for fund fees. Remember, those advisors charge you a fee on top of fees these individual funds charged, so chances are these are fees that you are already incurring that you may not even be aware of.

If you are looking for other investment options to further diversify your portfolio there are many. Binary options investing can a reliable fixed return investment to add to your burgeoning portfolio. Companies like Banc De Binary have a plethora of online resources for you to review and read up on. Consider that commodities are making a hot comeback as well. I know these types of investments are typically deemed to be stodgy and stale, but gold and silver are limited in quantity, and the limitation of a resource almost always makes it more valuable. We are even seeing silver rising in value at a faster rate than gold for the first time in a long awhile.

Avoid Borrowing Money from Friends and Family

We all get into a bind from time to time, for one reason or another, it happens to the best of us.  How you get through it and come out on the other side not only matters to your financial future, but also the relationships around you.  Whether it is a large sum of money that you could not get a personal loan for, maybe family or friends are offering a lower interest rate (perhaps even no interest) that would save you plenty of money on interest that you could not get otherwise, or need a few dollars short term to get by until the next paycheck, avoid asking family or friends for the money, you will thank yourself in the long run.

When the conversation is initiated it is awkward for both parties.  First the person coming to ask for money has to disclose finances, which whether you are in good or bad financial shape is not smart to discuss with those around you, as it usually can make someone jealous or envious.  Second, the person in the position to lend money may feel obligated to help, so it puts them in a difficult position to say no and feel weird around them going forward, or say yes and begin the process of having this person be indebted to them.

If a sum of money is agreed upon it runs the odds of being open ended, as typically money lent to family and friends tend to have loose terms and have no interest, putting a borrower and lender in a state of where the lender is always nervous wondering when the money will be paid, and the borrower not knowing when to pay it back.  After a period it could come across that the loan is not a priority, making the lender then hove the difficult talk to ask for the money back, and therefore suddenly get-togethers are getting awkward for both parties.  Neither will want to talk about the money that was lent, or anything that costs money for that matter.

When you lend money to family and friends you are sort of enabling them instead of helping them working through their problems, even getting to the point where more money could be asked for.  Not only is the money not collecting interest for the lender, but it also reduces their money if ever needed for emergency.  If you decide that it is ok to lend money, make sure there are terms are agreed upon, but must also be aware that there is a possibility that the money could never be returned, therefore jeopardizing the relationship.

 

 

 

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