7 Best CFD Trading Platforms in Nigeria

A Dive into the Details behind Contract for Differences

👉 Using CFDs, investors can speculate on the price movement of a variety of financial instruments. Financial investments are known as “derivatives” are those that are based on an underlying asset but are not the actual asset itself. Investors use CFDs to speculate on whether the price of an underlying asset or security will increase or decrease.

👉 CFD traders have the option of speculating on the direction of the price movement. Open positions are bought by traders expecting a price rise and sold by those expecting a price decline.

👉 If the asset’s price rises, the buyer of a CFD will put their position up for sale. The opposite is true if a trader feels that the price of a security will rise. A counter-trade is needed to close the position and again, the net difference between the gain and loss is paid in cash via their account.

Short and Long CFD Trading

👉 If you use CFD trading, you can make predictions about price changes either way. Subsequently, in addition to opening a CFD position that makes money when the underlying market’s price increases, you can also do the opposite and benefit when the market price falls. Selling, as opposed to purchasing, is referred to as “going short.”

👉 You can, for example, sell an Apple share CFD if you believe the stock would decline in value. Even if the price of the shares rises or falls, you will still make money or lose money based on the price difference between when you start and end your position.

Leveraged CFD Trading – All Nigerians need to know

👉 In CFD trading, you do not have to put down the whole cost of a big position to acquire exposure. When you use leverage, depending on the broker and the maximum ratio that they provide, you may just have to contribute as little as 0.5% of the total cost using a contract for difference, depending on the broker’s margin requirements on CFD trades.

👉 To maximize your returns, it is crucial to remember that the overall amount of your investment will be considered and while leverage can be useful, both gains and losses will be amplified relative to your expenditure, and losses can occasionally outweigh deposits, which is why between 60% and 90% of investors lose their money. Subsequently, it is critical to keep an eye on your leverage ratio and stay within your means while trading.

Margin Requirements in CFD Trading

👉 The ‘margin’ that is necessary to start and maintain a position, which is referred to as ‘margin trading,’ is a portion of the entire amount invested in the leveraged trade.

👉 There are two different kinds of margin used in CFD trading. To start a position, you will need a deposit margin also known as the margin requirement (expressed as a percentage).

👉 If your trade ends up losing more than the deposit margin and any extra money in your account is needed to cover this, you will need a maintenance margin.

👉 If your maintenance margin falls below a certain percentage, it might lead to a margin call from the forex broker, requesting you to top up your trading account balance if the worst were to happen. Any losses made could be realized if you do not contribute enough money to the position and it could also lead to the automatic close-out of the position, also known as a stop-out.

CFDs and Hedging

👉 Using CFDs to protect against losses in an existing investment portfolio can be an effective strategy. If traders believe that security could experience depreciation because of certain factors, such as an earnings report, or market news, you can offset some of this loss by going short on the market by using a CFD trade.

👉 If you hedge your risk using this, any depreciation in the security in your overall portfolio will be offset again in the short CFD trade that you executed.

Costs involved with CFD Trading

👉 When you trade CFDs, you will notice two prices namely a buy and sell price. The sell price, which is also known as the bid price, is the price at which you can open a short CFD while the buy or bid price is that at which you can open a long position on a CFD.

👉 The sell prices in the market will always be lower than current market prices while buy prices are slightly higher. The spread and subsequent cost of the transaction will be the difference between these two prices that are typically expressed as pips.

👉 The cost of opening a CFD position is often covered by the spread, which means that the prices at which you buy and subsequently sell will be changed to reflect this expense. However, some brokers do not charge a spread but instead match the buy and sell prices to the underlying market and charge a commission instead of the spread.

CFD Position Size

👉 Standard lots, which are 100,000 units of the base currency, are used to trade CFDs. The size of every contract will depend on the underlying asset that is being traded. In addition, this typically mirrors how the asset is traded on the market.

Contract Duration

👉 Unlike spread bets and options, the majority of CFD transactions have no set expiration date. Rather than that, a position is closed by entering a transaction in the inverse direction of the one that initiated it.

👉 To avoid incurring overnight financing fees, close your daily CFD positions before the daily cut-off time (usually 10 pm UK time, but this may vary on overseas exchanges). The fee is based on the amount of money your supplier lends you to initiate a leveraged trade.

👉 It is important to note that a forward contract is the one notable exception to this general rule. The overnight financing expenses are already included in the spread on a forward contract since it has an expiration date in the future.