CFD Trading: Making Money Without Owning Anything

Suppose you’re standing outside a candy store. You look at this candy bar which is standing on the shelf for $2. You think, “Hey this candy bar will be worth $3 tomorrow!” So, you tell your friend, “I bet you this candy bar will be worth more tomorrow. If I’m right, you owe me $1. If I’m wrong, I’ll owe you $1!”

Funny, isn’t it? You do not actually buy the candy bar. You just placed a bet on its price. That, in a nutshell, is how CFD trading sort of works.

So, What Exactly Is a CFD?

A Contract for Difference is sometimes referred to as a CFD. In many ways, it’s basically betting on whether the price of something will go up or down. Instead of actually buying or owning that thing, whether stocks or gold or perhaps candy, you’re just wagering on how its price will change.

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Suppose you want to speculate on the price of something in the stocks (say, Facebook or Meta, if you are fancy). You have a hunch that it will rise. So you go and bet with your broker. You tell your broker, “I bet the price of Facebook is going up, and if I succeed, I earn money. If I fail, I lose money.”

With such an ‘investment’, you make money whenever Facebook’s stocks gain value. And, you lose money when it decreases. However, here’s the shocking part! You never actually purchase or own any Facebook shares. Instead, you have a contract that says, “Hey, if the stock price varies, I get paid (or pay) the difference.”

How do you make money without having anything?

Now you are probably thinking, “How can that be? How can I make money when I don’t even own the thing?” Well, here’s where it gets cool.

If you buy a regular stock, you hope that its price goes up so that you can sell it later for more money. When trading CFDs, though, you can possibly make money in case the price increases or decreases. Yes, both ways!

– In case you feel that the price of a stock is going to increase, you “buy” the CFD contract. Then, if the price goes up, you can make money.

– However, in case you think that the price is going to fall, you can “sell” the CFD contract. Then, if it falls, voilà, you make money!

It’s literally trying to predict which way you will pay for your candy bar tomorrow. You can win either way, it can either cost more or less, all depending on your lucky guess.

But, Wait! There’s a Catch…

Now, don’t get too excited. While contract for difference trading can be awesome (who doesn’t want to make money without owning anything?), there’s a catch. And that catch is called leverage.

Leverage is essentially borrowing to bet larger. I have $10 to put down, but then I borrowed $90 from a friend to make it a $100 bet. Then, if you win, you will win much more since you were betting more money. However, if you lose the same $10, you lost a lot because you still have to pay back that borrowed $90.

In CFD trading, you can control bigger positions with less money upfront through the power of leverage. Be careful, though! You might even lose more than you ever could have imagined if your bet is wrong. It is somewhat ‘gigantic’, both for profits and potential losses, when you make money through leverage.

The Fun Part: You Don’t Own Anything

The wonderful thing about CFD trading is that you never actually own the thing you’re betting on. You’re just betting on its price. You won’t get dividends like an ordinary stockholder, and you don’t vote in company decisions.

But you are not going to be bothered with owning a lot of stock that will be running up and down everywhere; it is only you, your bet, and the change in price. Easy as pie.

Is CFD Trading for You?

If you fancy the idea of betting on prices without actually owning anything then CFD trading is just for you. It is ideal when you want to take advantage of changes in prices quickly and easily. And also when you do not want to bother yourself with the hassle of buying and owning things.

But, as with every bet, there is risk attached to it. If you don’t know what you’re doing, you can lose money faster than a candy bar melts in the sun. So make sure you do your homework before creating real bets and maybe not bet your life savings on candy bars.

In the end, CFD trading boils down to being a bet on the price instead of a purchase. It’s really a case of win all or lose all. If you win, well, you get everything. And if you lose? Well, you would probably wish you had bought that candy bar instead of playing CFD.