One of the ways that an investor can access the stock market is through contracts for difference, commonly known as CFD trading.
CFDs can be an effective form of trading to gain a larger exposure to the stock market, through leveraged trading, as well as having the opportunity to take a position on both rising and falling prices. Mainly used among experienced investors, let us explain more about how CFD trading can be used to trade stocks.
Definition of stock CFDs
When it comes to trading in stocks using CFDs, the first thing you should understand is what CFDs are. CFDs are financial derivatives that take place between a trader and a broker, usually through an online CFD trading platform, opening and closing a position based on the speculative price movements of a financial market.
In terms of stocks, CFDs can be used as means to access the market, without owning the underlying stock. With a lack of ownership, it means that you do not have any involvement in the voting rights of the company, or receive dividends; which could be seen as a disadvantage. However, CFD trading means that you can open a buy position if you believe that there is to be a rising trend in the market; or you can open a sell position if you believe there to be a drop in prices. This potentially could lead to a gain on either a rising or falling stock market.
Through an online CFD trading platform, you can also have the ability to use leveraged trading to gain exposure to the stock market. Leverage enables you to trade on a large portion of the market, with a lesser amount of capital for your initial deposit. This can greatly improve the level of your returns on your investment, based on the leverage ratio available. However, just as much as your profits are multiplied with leverage trading, it also will magnify any losses incurred, as it always based on the full value of the investment.
Trading stocks using CFDs
To begin trading in this format, you will need to choose the right platform. You should look for an online CFD trading platform that suits your needs, is user-friendly, and that is an authorised and regulated site. A great customer service system is also always a bonus. Using the right place for trading stock CFDs can elevate your trading to the next level.
Once you’ve chosen the trading platform of preference, you can create an account and deposit the required amount of capital. Now you can look at which stocks you will base your position on. Online CFD trading allows access to stock markets around the world and many, popular shares. There will be a variety of shares available, such as well-known brands Amazon, Facebook and Netflix – all of which you can speculate on the movement of their prices with CFDs.
There are two positions you can take with a stock CFD: buy and sell. As aforementioned, when opening a buy position, you believe the price of the underlying stock will have an upward trend. On the other hand, if you predict the value to be on a continuing downward trend, then you open a sell position. You open and close the contract according to the movement of the price of the underlying stocks, and the profit or loss is calculated from the difference between the price of opening and closing the CFD.
All from one account, you can open as many contracts as you like, sometimes called units. One unit is the same as one CFD based on the value of one share. You can also use CFD trading for as many different shares as you like, suited to your trading strategy. If you own the said underlying share, then you can also use CFD trading to offset any losses that you predict from the loss in value.
It is always wise to have a diverse investment portfolio, which can include that of trading stocks using CFDs. Just like traditionally trading, this form of trade does come with its pros and cons, so always do your research before investing.