In the past few years, more Nigerians have been introduced to CFD trading, and a lot has taken a considerable interest in the trade.
Several international CFD brokers have launched their services in Nigeria, so traders now have local access to the market. Like every other trade out there, CFD trading is not something to rush into simply because you are interested in it.
Before we proceed, let’s answer the basic question – what is CFD trading?
What Is CFD Trading?
CFD stands for Contract for Difference, so when we say CFD trading, we mean a trading contract for differences. CFD trading is derivative such that you focus on the difference of the price of assets from their initial open price – if it will rise or fall. When trading CFDs, you can speculate on the price movement of cryptocurrencies, fiat forex currencies, indices or stocks.
When you trade CFD, you do not purchase or sell these assets. What you purchase or sell are the assets units, and you place your money on two options; that the price of the assets will rise or it will fall upon closure of the market. This means you can make a profit whether an asset loses or gains value, so long as it is what you predicted. If your prediction is right, you gain more units of the assets you purchased or sold. If your prediction is wrong, you’ll lose the units. Because, Nigeria is highly religious country with over 50% of its population being Muslim followers, you also have to verify whether CFD and forex trading is halal or haram according to Islam. Once you do that and you are sure that your faith is not in the way of your possible gains, check out these five things you should know about the CFD market.
5 Things You Need To Know About CFD Trading as a trader from Nigeria
Leverage is what trading CFD is all about. Unlike normal trade where you have to purchase the stocks by paying their full value, you pay only a very small percentage of the total value in CFD trading. Since you pay only a small percentage, you are not the full owner of the trade, but you can open your trading position. You get full access to monitor the price trend of the asset which your units are a part of. With this, it is possible to switch to more significant positions and thus increase the number of your units and subsequently earn more money. This is how leveraging works, and it also applies to losses. CFD trading offers high leverage as an advantage.
The money you pay as a small percentage of the full asset value is what is referred to as margin. Margins make your trade valid as they allow you to open a trading position. As mentioned earlier, CFD can be traded on different assets such as commodities, shares, currencies, cryptocurrencies, treasuries, or indices. The acceptable percentage margin differs among these assets and also brokers but are usually very minimal – mostly 3% and below. To be able to trade CFD, your margin should be ready before the market is opened. Some brokers do place limits on their margin requirements due to stop-loss orders.
- Available deposit and withdrawal methods
If you are based Nigeria, there is a high change that you will expect from your FX/CFD broker to accept mobile money. The most popular mobile money system in the whole of Africa is M-Pesa, so if that is your preferred payment method, you should be looking only for forex trading brokers that use mpesa. If you do not use mobile money and you rather use credit/debit card the number of available FX/CFD brokers increases significantly.
- Global Market
As you trade CFDs in Nigeria, know that the market is a global one. You can access almost every stock market across the world, trade CFDs on a different asset, and open as many positions as possible. There are over 4,000 markets worldwide, and unlike other trades where you need to sign up with various brokers to access different markets, you can do it all with a single CFD trading account. However, with such vastness, a CFD trader should be careful as the CFD trading industry is not well regulated. Investigating the background of a broker before investing with them is very important.
- Market Volatility
Volatility can be described as a measure of uncertainty; how unpredictable something is. Before you invest in CFDs, know that the market volatility is on a very high side. This is as a result of it being a global financial market and can be affected from various angles. High volatility of the CFD market is both an advantage and a disadvantage; the price of assets can increase or decrease by the same percentage. Therefore as a CFD trader, you are to watch the market trends with focus as any distraction can result in fatal loss.
- Stamp Duty
CFDs are currently free of stamp duty. Even though profit can be made via CFD trading, you are merely trading the difference of assets with CFD brokers, and it doesn’t count as owning the actual asset. So when you trade CFDs, you have the advantage of keeping a huge part of your profit as there’s no stamp duty to take out. Regular stock trading does require a 0.5% of your profit as stamp duty. However, Capital Gains Tax may still need to be paid, and there is every chance that stamp duty may be charged in CFD trading in the future.
CFD trading can be very profitable when done with expertise. By paying a small percentage of an asset and opening a trading position, you can earn almost the full price of the asset at the end of the trade. Similarly, you can lose the entire units and go with nothing. It is recommended that you study the rules and ethics involved in trading CFD before venturing into it.
~ Guest post by Trading Beasts