RCML refers to the four (4) extremely significant things that investors should understand when it comes to trading contract for difference or CFD. These are about its risks, costs, as well as the aspects of margin and leverage. It is in this regard that this article will try to explain these aspects in as layman as possible so that people can comprehend these concepts better.
What are the risks of trading CFDs?
First and foremost, more than the profits and earnings that an investor can benefit from trading in this platform, it is always vital to know the risks of trading these instruments. This is because these are also the factors that will determine whether a trader will earn something or not in the end. For example, even if a trader has the best plan or strategies, it will be futile if they will not take into consideration the risks at all. In other words, they might even fail too if they are not going to account these.
What is the cost of CFD trading?
Secondly, on the other hand, the cost of trading these instruments should also be among the first things that traders must ponder on. The general rule of thumbs suggests that when the costs are too high and beyond the rewards that the traders are expecting, then there is no point in engaging into this in the first place. These costs include the money traders need to spend for opening an account, hiring a broker as well as the capital requirement. Of course, traders must balance the cost with the rewards. There should be more rewards than the cash outflow.
What is margin and how it works?
Thirdly, margin is one of the most basic concepts that investors should understand in this platform. This margin refers to the deposit requirement in order to secure the transaction against those with leverage. This is extremely valuable in order to make the leverage work smoothly. In most trading platforms, the margin requirement is at 5% mark. Hence, this affords the leverage up to a factor of 20. Nevertheless, this rate may still vary, depending on the market condition as well as overall trading climate.
What is leveraging in CFD trading?
Fourthly and lastly, trading in this platform is all about leveraging. This is, in fact, the key element of trading this instrument. Aside from that, this also sets apart this from the other financial instruments out there. This is because it is a fund or capital that traders can use in order to access large transactions in the short-run. Hence, this may have an effect to provide greater capital returns than just trading in ordinary manner. However, traders should not abuse this because this also amplifies the possible losses.
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