Trading Stocks with CFDs

When Did CFDs First Appear?

There are several ways to gain exposure to the stock market, including cash equities and derivatives like CFDs. Over the last decade, trading Contracts for Difference (CFDs) has grown increasingly popular. CFDs allow traders to take advantage of the price movements of stocks without actually owning the underlying asset. A CFD is essentially a contract between two parties (the provider and the trader) to pay the difference between the entry and exit prices. This makes CFDs a financial derivative, as their value is derived from the price of the underlying asset.

The rise of CFDs has made stock trading more accessible to the masses by lowering entry barriers and costs. This has sparked greater interest in the stock markets, giving them a renewed focus.

When engaging in CFD trading, it is essential to choose a reliable and regulated provider, such as PFD Markets, to ensure transparency in pricing and transactions. Regulated providers also safeguard clients’ funds and clearly outline the risks involved, preventing traders from falling for misleading “get-rich-quick” schemes.

Trading Stocks vs. Trading Stocks CFDs

CFD trading involves leverage, meaning you can control a larger position with less capital. The leverage ratio is the total exposure compared to the margin you’ve invested. While this allows you to amplify your exposure, it also means your profits and losses are based on the full value of the position. This can increase both the potential for profits and the risk of losses.

Unlike traditional stock ownership, CFD traders do not own the underlying asset. When buying shares, investors typically gain additional rights, such as voting rights and dividends. CFDs, on the other hand, offer traders the ability to profit from both rising and falling markets. You can take a “Buy” position if you believe the price will rise or a “Sell” position if you expect the price to fall.

One of the main advantages of CFDs is the ability to trade a wide range of assets from global markets all from a single account, making diversification easier. You can open or close positions at the prices you choose, providing flexibility. However, if a position is left open overnight, an overnight financing fee may be applied, making CFDs less suited for long-term investments.

Opening a CFD trading account is often quicker and simpler than opening a traditional brokerage account. While stock trading is generally used for building long-term portfolios, CFD trading is typically employed for shorter-term strategies, such as during earnings reports or other market-moving events.

CFD prices mirror the prices of the underlying stocks on the relevant exchanges. Essentially, the buy or sell price a CFD provider quotes reflects the trading price of the stock on the market. In this way, CFDs and stocks are traded similarly, with the key difference being that CFD traders do not actually own the stocks they trade.

To summarize, trading CFDs on stocks is typically a short-term strategy aimed at profiting from price fluctuations, while investing in stocks is usually a longer-term approach. Both methods offer unique opportunities, so the decision between trading CFDs or investing in stocks will depend on your financial goals and strategy.

Comparison: Stock Trading vs. Stock CFDs

CFD Trading Example

Let’s break down a simple example of CFD trading using PFD Markets:

Suppose the price of one Apple stock is $50, and you decide to enter a CFD contract for 15 shares. That’s 15 shares x $50 per share = $750. However, with leverage, you don’t need to invest the full $750. Using a leverage of 1:5, your margin requirement is just 20% of the total position value, or $150. It’s crucial to ensure that you have enough funds in your account to open and maintain your position.

If you expect Apple’s price to rise, you would open a “Buy” position. If you think it will fall, you would open a “Sell” position. You can also set stops to automatically close your position at a specific price. Once your position closes, the profit or loss will be added or subtracted from your account balance. If your position remains open past market close, an overnight financing fee will apply.

Using the same account, you can also trade stocks from other markets, like Nintendo, BP, or Adidas, without any additional requirements.

The Bottom Line

CFD trading offers both advantages and drawbacks when compared to traditional stock trading. Both methods allow traders to capitalize on price movements in the markets. The key to success is understanding your trading objectives and selecting the trading method that best aligns with your financial goals.