The introduction of CFD trading in Malaysia is an excellent development as such services were previously only available to those who lived and worked outside the country. It has now been expanded to include Malaysians with access to online brokerage accounts.
The first step for anyone looking at starting on the path of CFD trading is to become familiar with what exactly they are and how they function. While they may be pretty popular, these instruments (which come under the umbrella term ‘derivatives’) can seem complicated and confusing. They should not be approached lightly or without sufficient preparation – it’s no different than jumping into an F1 race car if you’ve never driven before!
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So just what are contracts for difference?
A CFD is a financial instrument traded on margin. It is a contract between a buyer and seller, with the former agreeing to buy an asset from the latter within a specified timeframe at a price predetermined by the two parties. In this regard, you’re not buying or selling anything – it’s just an agreement that comes into effect if you choose to execute it.
In other words, CFDs are derivatives that let traders speculate on share prices without taking ownership of actual shares. How does this work? Well, let’s say you make a £10 bet with your friend that Company X will outperform Company Y in terms of share price growth over the next 12 months. At the end of the year, if Company X has performed better than Company Y, you’ll win £10. However, if it underperforms, you’ll lose your money, and your friend will pocket it instead.
The same principle applies to CFD trading.
CFDs work through buying and selling contracts linked to real-world asset prices. If done correctly, CFDs can represent a significant source of steady income as they provide flexibility in terms of entry and exit points into the market and leverage (although this is where things can get risky ).
It should be noted that leveraging creates additional risk for traders, both on the amount invested initially and on balances during trading. For example, suppose a trader wants to open a position using 1:3 leverage by putting down only 30% of the entire balance required at current market rates. In that case, they will be exposed to possible losses that are three times the amount of your initial investment.
Diversify your portfolio with CFDs
That said, it is still worth bearing in mind that CFDs offer a fantastic way to diversify one’s portfolio by investing in large companies at relatively low rates. If you want to buy shares but cannot afford them due to financial reasons, CFD trading could help you out.
Use virtual money
As with any new endeavour, the best approach when trying out CFDs for the first time is through practising with virtual money. It means signing up for an account that offers virtual cash (sometimes known as ‘demo’ accounts), so you have some funds to play with. You can then try out various strategies without worrying about losses or commissions (you could try here). There are also online forums where traders with experience in CFDs share their knowledge with others who are new to the game.
Open an account with a brokerage
Once you feel ready, it’s time to open a real trading account with a brokerage firm of your choosing. Before making a deposit, make sure you read through the terms and conditions thoroughly to understand better what fees will be involved when opening and closing positions on the market. It might end up being more cost-efficient for you to use a dormant account that has been opened by someone else to practice CFD trading before going live.
Bottom line
Finally, remember that while CFDs are more accessible than ever thanks to the expansion of the online trading industry, you should never be too rash in placing bets with your hard-earned cash. Always go for a reputable firm that will hold your hand throughout the process while also offering quality customer service whenever you need it.
