Over the past 10 years, Contracts for Difference (CFD) trading has grown in popularity in Africa and this trend is expected to increase through 2021 and beyond. CFD trading is a good way to make short term investments with low initial capital, however, it doesn’t come without risks. As such, it is crucial for traders to ensure they understand how CFDs work in order to be successful.

This is according to Dany Mawas, Regional Director at INFINOX, an award winning FX and CFD broker, who says that CFDs are an attractive investment opportunity and there are ways for people to start trading cautiously. “For example, auto copy trading can be done on apps such as IX Social, which means that beginner traders can copy the trades of successful traders in order to achieve the same returns.”

CFDs allow traders to make a profit on the price change of an asset without having to own it, explains Mawas. “As such, the trader doesn’t need to buy a particular stock or commodity to make a profit in the future. Instead, the contract between a buyer and a seller provides traders with the ability to trade on margin without owning an asset outright.”

Mawas outlines some tips for those that wish to learn and place trades based on their own strategies:

Start out using a demo account: A demo account is essentially a simulation account which provides users with the opportunity to practice placing trades and become accustomed to the effects of what happens when the market moves. In order for this to be as realistic as possible, it is advisable to keep demo trades within the amount that you would place on a real trade.

Do your research: Learn the types of financial instruments you can trade, understand the trading terminology when it comes to CFDs and know what leverage and stop orders are to manage your risk. 

Understand the platforms: MT4 and MT5, for example, are the leading industry platforms and the choice of the majority of retail traders. MT4 allows you to access the entire Forex market, some CFDs and futures trading too, as well as providing a range of tools to aid and develop your tracking knowledge. MT5 is the latest addition from MetaQuotes which allows you to access more assets and introduces you to a range of institutional tools. Trades can also be placed on apps such as IX Social which also offers the element of community based learning.

Use leverage wisely: Leverage allows traders to put down a fraction of the full value of the trade. This way traders can take advantage of the market’s movements whilst using smaller amounts of capital. However, traders can also face risk when using leverage and losses can be increased. As such, it is important to have a cautiously leveraged portfolio.

Consider risk management: It’s recommended that traders use risk mitigation tools such as stop loss orders when trading with leverage. Once you know the correct way to set stops, record, and review your thought processes and trading results, you are better placed to succeed in trading.

Don’t put your eggs in one basket: It's important to have a well-diversified portfolio to take advantage of any market condition. Those looking to diversify their portfolios can start by investing in asset classes that have low or negative correlations so that if one trade falls the other can potentially counteract it. Furthermore, ETFs and mutual funds are easy ways to select asset classes that will diversify your portfolio.

Choose a reliable CFD broker: Ensure the broker you use is regulated. Brokers are required to register with a regulator in the countries they operate. Examples of respected regulatory bodies include South Africa’s Financial Sector Conduct Authority (FSCA) or the United Kingdom’s Financial Conduct Authority (FCA).

It is also important that it’s easy to contact your broker and that they have a physical presence in your country so that you can access any form of assistance that you may need.

“Trading CFDs offer the opportunity to make additional money, however it is vital that those wishing to trade ensure that they are safeguarded in all aspects in order to be successful,” concludes Mawas.