Investors can buy and sell shares through a stock exchange or over-the-counter (OTC) market, as well as trade via a stock broker. All of these strategies involve owning these shares, whereas stock contracts for difference (CFDs) differ from regular stocks, and don’t involve this type of ownership.
Both CFDs and traditional stock trading aim to profit from price movements in the market, but in this article will explain more about stock CFD trading, and how it can be an advantageous addition to your investment portfolio.
What are stock CFDs?
Stock CFDs are another way that traders can access the stock market, without owning the underlying share in the company in question. Instead, you open an agreement with a CFD broker, like with Plus500 for example.This allows you to speculate on the price movement of the stock’s value, with the returnsbeing based on the price difference between the opening and closing rates of the contract.
As previously mentioned, ownership is not a requirement for this type of trading, so there is no delivery of physical goods or securities. This does however mean that stock CFD traders are not entitled to voting rights or dividends from the companies in which the shares are invested in.
One of the benefits of stock CFDs is the option of trading with leverage. This gives you more exposure to the stock market with less initial deposit required, and is based on a leverage ratio,set by the CFD trading platform. For example, a leverage ratio of 1:30 will amplify a deposit of £100 to a market position of £3,000. This leverage is usually higher than traditional stock trading, and so is regarded as an efficient use of your capital. Although it can potentially lead to higher returns, as it magnifies the value of your profits, it can also amplify your losses, as both are determined by the full value of the investment.
How does stock CFD trading work?
The first step in investing stocks with CFDs is to choose the right broker to conduct the trade. Always research the CFD broker, and proceed with a reputable and regulated provider. Also check out their leverage ratios, and make sure that all transactions that take place are completely transparent.
Once your account has been created on a CFD trading platform, you need to deposit the amount of capital that is within your trading budget. Then it’s time to choose the shares in which you wish to invest and trade in. Again, just like researching the CFD broker, you should conduct extensive research into the stock market, as well as the individual shares you may trade in. This ensures that you make well-informed decisions and form an effective trading strategy.
You can trade as many CFDs as you like from the same account, sometimes referred to as units. You can open a Buy or Sell position depending on the price movement that you predict. This means that investors can speculate on both a rising and falling trend in the stock market. If you think the stock price will rise, you would open a Buy position. Likewise, if you think the market will fall, then you would open a Sell position.
Depending on the fluctuations in the stock market, and the position you held, the CFD is then closed accordingly. The profit or loss is determined by the difference in the quoted price of the contract on opening and the price of it at closing. The prices of the CFD reflect the value of the underlying stock it refers to, with the supply and demand of the CFDs coordinated by a network of CFD brokers. Any profit or loss incurred is then shown in your account balance.
Advantages of stock CFD trading
Abenefit of trading in CFDs is that you can gain access to global markets all from one account. This allows you to speculate on the rise and fall of prices in the markets of the US, UK and Germany, to name but a few. You can also trade CFDs on popular stocks of well-known companies, such as Facebook and Apple.
Due to the nature of CFDs and the advantage they pose, investors can trade on falling stockprices, or hedge their losses against a bearish market,if they actually own the underlying asset.
Through the CFD trading platform, you can take advantage of several trading tools, such as stops and limits that can help to maximise your profit, whilst minimising your losses. You can also trade in various underlying shares, through CFD trading.