Share

CFD Shares Trading

Contracts for difference (CFDs) can be used for all sorts of financial markets. If you are already trading shares, it will be worth your while learning how to do this using CFDs, as they give you much more scope for high profits.

CFD shares trading involves leveraging your money. Rather than having to find money to own stocks, for a fraction of the price you can control and benefit from the change in value of the shares. In other words, CFDs provide a way to speculate on share price movement without having to buy the shares.

This has several advantages. The one which most people focus on is the leveraging or gearing of their money, which gives CFD trading the potential for much larger profits than regular share trading. The amount of money you need in your account to take out a position with a contract for difference may be about 10% of the share face value. This percentage varies depending on the shares and on your CFD provider.

The level of leverage depends on the liquidity and market capitalization of the stock. The largest, most liquid stocks will have a 10% margin (10 times leverage), whilst the indices offer even more. As the size and liquidity of the stock decreases, so does the amount of leverage available.

So for 10% of the cost, you can control and profit from the change in price of the shares of any major company, even companies traded on different stock markets. As you never own the shares, you avoid any liability for stamp duty. Most commonly, your CFD provider will be a market maker which means that they set the price for the CFDs, but that will usually mirror the underlying share prices.

Another feature of using CFDs for shares trading is that you can take a short position as easily as taking a long one. This allows you to profit from falling stock prices during a bear market. While you can take a short position directly on shares, this involves your broker borrowing shares from another party, so it is more complicated than using CFDs to go short.

What are the disadvantages to CFD shares trading? As with any leveraged product, if you take the wrong position on the transaction you can lose more money than you have in your account. You need discipline to make sure that you quit the losing position before losses become too large, and you need to learn and exercise analytical skills to find the shares with the best chance of performing. Inevitably, some will not go as expected, and you need to play the odds to come out on top.

Also there is an interest charge for any long CFD you hold overnight, and this is effectively a price for borrowing the full value of the shares. Some brokers charge a commission on each transaction, but frequently the CFD providers profit comes solely from the difference between the price they quote you for buying and for selling the CFD, which is called the spread.

If you’re interested in the stock markets, and in making money from trading, then you should look at doing CFD shares trading. Properly implemented, trading shares using contracts for difference can be a profitable way of beating the markets.

A broker commented ‘The advantages of CFDs are not just leverage. The stamp tax saving and the ability to short are reasons alone to trade a CFD over a share. A good example recently was an Oil ETF a client wanted to short. The ETF has no stock borrow liquidity which meant it was hard for us to short on the clients behalf so we advised him to short the Nymex Crude CFD which was more liquid, had a tighter spread, no borrow requirement (since it’s based on a future) and a lower margin rate.’

Join the discussion

Share
Recommend this on Google

The content of this site is copyright 2015. Contracts for Difference Ltd. Please contact us if you wish to reproduce any of it.