With more than one million people in the UK now having a second job to provide much-needed extra income, many are turning towards CFD trading on the side.
Online trading platforms that operate 24 hours a day are providing full-time workers with the ability to bolster their bank balances. Whilst the average professional trader salary is around £51,660 per year, plus commissions, independent traders can still make a fair amount – if they know what they're doing.
How do CFDs work?
Contracts for Difference (CFD) is a trading method used by experienced traders. CFDs are a contractual agreement between financial investors and businesses. This agreement is never for a physical asset, but is instead a calculated assumption that a share price for a good or service will go up – or down – and the owner of the contract can then sell at a profit.
Buying into a CFD allows you to speculate on the future price of that asset. When this occurs, the buyer must pay the seller the difference between the current value and the agreed value within the contract.
If the price of an asset increase, the investor can look to make a tidy sum, however, if the price of the asset decreases, they could make a loss.
What are the benefits of CFD trading?
There are a number of benefits to CFD trading:
Because you don't own the asset or shares, the buy-in for CFD trading is relatively low.
CFDs are more flexible than other forms of trading.
Because CFD trading is speculative, there's no stamp duty to be paid on any profits.
What are the drawbacks?
Whilst CFD trading has many benefits, it does have its drawbacks:
Whilst the small buy-ins make CFD trading a benefit, if the CFD underperforms, you're liable to pay the broker the difference if the margin dips below the agreed sum.
CFDs are much riskier than other forms of trading, as such, you should never invest more than you're willing to lose.
When trading CFDs you never own a tangible asset. You only own a contract with a broker that a share is based on.
What's the difference between CFDs and Futures?
Another popular form of trading is futures. Futures are mainly traded on exchanges. Future prices are determined by markets, whereas CFDs are traded through brokers, and prices are based on speculation.
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