What are CFDs and CFD Trading?
What are CFDs and CFD trading?
The CFD market of New Zealand is still rather young and underdeveloped, which is unfortunate for those interested in it. Still, thanks to the fact that the entire world is now connected through online trading via the internet, it is more than possible to trade CFDs even in New Zealand. Today, we will explain what CFDs are, what types are available, as well as the pros and cons of trading CFDs in NZ.
What are CFDs?
Before we move on and talk about the advantages and disadvantages of CFD trading, let's first make sure that everyone is on the same page by explaining what CFDs are and what it means to trade them.
CFD (Contract For Difference) is an agreement — a contract — between individual traders and a CFD broker. These agreements are based on traders' attempts to guess the future price of certain underlying assets. In other words, CFD is a type of derivative investment, which allows traders to make a profit based on the underlying assets' price fluctuations.
The greater the price fluctuations, the more difficult it is to guess where the price might go next, which brings a certain amount of risk. However, guessing the price movement correctly allows traders to earn money, which is why this type of trading has attracted countless traders — but also numerous brokers — over the years.
What types of CFDs are there?
The CFD trade has grown to be quite popular and well-developed around the world. This has led to its expansion, which is the reason we now have many different types of CFDs. If you are interested in trading these assets, you can choose between:
- Share CFDs — most commonly traded CFDs based on stocks
- Index CFDs — tied to the performance of specific indexes
- Currency CFDs — tied to the performance of global currencies
- Commodity CFDs — tied to physical assets that are in demand
- Treasury CFDs — for those who wish to speculate on the treasury notes value
- Sector CFDs — revolve around finding a growth area anywhere in the world
These are some of the most popular types of CFDs, which you may want to consider if you are interested in trading global markets.
Why should you trade CFDs?
Of course, you might be wondering why you should consider trading CFDs in the first place. There are numerous benefits and advantages to trading Contracts for Difference, such as:
- The easiest and cheapest way to access global markets from NZ
- Even smaller price moves can be very significant when trading with leverage
- You can profit even when the prices are dropping
- CFD trading doesn't have settlement periods when closing a position
- There are numerous successful trading strategies, such as Pairs Trading
- There are numerous and diverse instruments that can be used in CFD trading
- Getting started is pretty simple, as learning CFDs is easier than many alternatives
- Having a losing position makes you meet the losses as you move forward, meaning that you won't get stuck with a large bill for the lost amount.
These are some of the main advantages of CFD trading, although there are many more, as traders tend to learn as they go.
Risks of trading CFDs
Of course, where there are benefits, there are also risks that should be kept in mind at all times. Being too careless and allowing yourself to forget the risks is the first step towards experiencing losses. Here are the main risks that you should always be aware of:
- The counterparty, the CFD Broker might fail to meet its financial obligation
- Choosing highly volatile assets is risky because changes in the asset prices are difficult to predict
- Liquidity risks are also a common threat, as there might not be enough trades in the market for the underlying asset
- Overtrading is a risk that appears as a result of trading addiction, boredom, overconfidence, availability, and alike
- Overconfidence itself deserves to be listed, as many traders experience a few wins which inspire them to take greater risks, which is usually when they see losses
- Entering positions against the trend happens when you go short while the prices are rising, and vice versa. This can see you make losses, rather than gains.
- Not doing research or trading assets you are unfamiliar with is nothing short of gambling, and most traders do not get lucky with their guesses
As you can see, there are quite a lot of risks that CFD trading brings, but most of them can be eliminated simply by trading with levelled head. Try not to give in to emotion, and you can easily avoid a lot of the dangers and pitfalls along the road.
How to get started?
The process of entering trades on various platforms is simple enough, but that is not what we have in mind when we talk about getting started. Instead, we believe that the most important part of trading is preparation. Interestingly enough, this is the step that is often skipped by many who are in a hurry to actually get to where all the action is. This is why most newcomers see losses as soon as they start trading.
To be a successful CFD trader, you need to start by educating yourself on what it is you will be doing. You need to learn three things:
Know that the safety of your funds must always come first. To be safe, you need knowledge and information. Learn the rules, but also what tactics are successful. Spend some time reading about CFDs, their behaviour, the patterns that may become apparent as you sharpen your skills and instincts.
Compare different platforms and see what they offer, what are the terms, which are easy for you to navigate and use. Only after doing all that will you be ready to start making well-informed decisions instead of just making random moves that will not pay off most of the time.
What CFD markets are there?
There are numerous CFD markets available, depending on the type of underlying asset you wish to trade contracts for. Some of the most popular ones are as follows:
Out of all of these, cryptocurrencies like Bitcoin are by far the most volatile and uncertain, but also among the most rewarding ones. Bitcoin tends to move suddenly and often only for a brief time, which makes it difficult to catch the opportunity, but if you keep an eye out and make the right move — you could seize some great opportunities.
Forex trading, on the other hand, has a number of benefits, such as high liquidity and constant availability. However, it comes with its own risks that may occur due to different exchange rates, risks related to dealers/brokers, the stability of the issuing country, and more.
Another very popular CFD to trade are indices, such as the Dow or the S&P 500, these give you the benefit of tracking global market sentiment without having to focus on individual companies. Indices trend more but risks come from global political events causing sudden movements that are hard to predict.
Simply put, you should always look for the good and the bad, and carefully consider the market and the situation surrounding it from all angles before making a decision.
Which CFD platforms are available in NZ?
New Zealand's trading scene has developed significantly in recent years, and there are quite a few platforms for aspiring traders to choose from. According to the FMA's (Financial Market Authority's) website, there are as many as 9 licensed derivatives issuers who offer CFDs. To make sure your money is safe you should always use a licensed broker and avoid offshore unlicensed brokers.
Most of the good brokers allow you to trade Forex, Shares, Commodities, CFDs, Metals and Indices, all of which can be traded easily thanks to the user-friendly platforms that the broker uses. These include MetaTrader 4 and Trader Workstation.
MetaTrader 4 offers Fast Execution, Deep Liquidity and Tight Spreads Across 50+ Markets, as the platform itself promises. It also features various tools, such as charts, indicators, multiple timeframes, advanced trading analysis options, and more.
As for Trader Workstation, it claims to provide the largest range of products in the world, while offering Stocks, Forex, Options, Stock CFDs, CFDs and Futures. With it, you can trade on more than 100 markets internationally, it offers over 60 currency pairs (major and minor alike), and it provides access to the most liquid ETFs in the world. It is also very rich with tools and perfect for professionals and newcomers alike.
How to choose a CFD broker?
As a trader, you likely know that trading CFDs is not the same on all platforms and choosing the right one can sometimes make all the difference. You need to make sure that you are focusing on safety, and to only deal with licensed brokers.
When choosing the best platform, there are many things to keep in mind — things that they all have but organize in different ways. Their usefulness to you depends on what they offer in terms of:
- Types of trading accounts
- Variety of trading instruments
- Whether or not they offer leverage
- Order execution quality and slippage
- Local customer services
- Tools and add-ons
- Whether or not they are regulated and licensed
- How they secure funds
- Quality of customer service
- Education and training sessions
These are the things you should be on the lookout for, although the order might vary depending on what you need and what you want. For most new traders, a user-friendly platform that offers good education is likely but fewer options in terms of tools or trading instruments are likely better, at least for the initial period, while you are getting familiarized with the concept of trading.
Experienced traders will likely value security, tools, and leverage, rather than how easy it is to find their way on the platform. Everyone should only use regulated brokers, as it eliminates a number of additional risks that you likely do not want to take.
In the end, CFD trading in New Zealand is more than possible and available to everyone with an internet connection and a bit of time to learn the basics and do their research. This is what you need to get started, while the rest will come with experience.
Always keep in mind to only use the funds you can afford to lose, as even the most experienced traders sometimes make a bad call and suffer losses. Doing so with the money you can't live without is a sure way to end up in a lot of trouble. That, and always remember to think logically when making a move, instead of following emotions or relying on luck. Remember the advice we gave above, and there is no reason why you shouldn't become a successful CFD trader but understand that it will take time and effort.