How to trade stock CFDs?
trade stock CFDs
If you want to trade stock CFDs, you will need an online trading account—many account providers, including Saxo(follow this link to find out more), IG and ETX Capital. The beauty of CFDs is that they can be traded on almost anything, even intangibles like volatility or politics.
If you’re new to CFD trading, then it’s also worth reading the information provided at CMC Markets. Everything here is either opinion or personal experience and never financial advice, so do your research before investing in any company.
When trading stocks using CFDs, there are two types: people usually go for shares and indices/futures. Shares offer the ability to buy something at a fixed price, so if you think it’s going up, you can purchase it and wait for your return.
If you’re wrong, however, then that loss could be substantial. Indices are more volatile in a sense they may not move much one day but will have significant percentage changes on another day. They are also worth their weight in gold because there are thousands of indices available.
Let’s focus on trading shares down under (or CFDs on ASX). To buy or sell a share using CFDs, all it requires is money movement from your account. No need to transfer anything physical anymore. Plus, you avoid stamp duty associated with buying physical stock certificates too.
Cash-settled or physically settled
You can buy two types of CFD shares, either cash-settled or physically settled. A cash settlement will move money from your account to the selling party. It is similar to how a share purchase works, except you’re not transferring anything physical.
On the other hand, a physically settled deal is very different because it involves delivering/receiving stock certificates. It is only possible if both parties have the actual certificate they are trading in hand, which usually doesn’t happen unless it’s an ‘in person’ trade.
So let’s focus on cash-settled CFDs
These CFDs work just like any margin product where 40-60% of the value of the stock must be held in your account for when that big crash happens. It is known as the margin requirement.
Some brokers will calculate this percentage for you; others may require you to figure it out yourself (usually by using a 3rd party calculator or asking your broker). The benefit of using a 3rd party service is that they’ll usually let you know the current price/share volume so you can put in an order straight away. Remember, no money changes hands when placing buy limit orders. To ensure your cash balance can cover that cost before making any trade.
CFDs have little risk involved with trading them. It’s almost impossible to lose more than your initial deposit amount because if the market crashes, you hold the share until the price rises again.
It is also beneficial when trading CFDs because if you think a stock/index is going down, your broker will automatically place limit orders for you to sell it at a higher price.
Sure there are brokerage fees involved with each trade, but they’re so tiny in comparison to buying/selling shares I’m not even going to mention them here.
Just know that if you employ advanced strategies like scaling into and out of trades or hedging, your profits can be much more substantial. Also, remember that most brokers offer reduced rates on their trading platform/commissions.
Just note that by trading CFDs, you’re technically ‘borrowing’ money from the market. If everyone decided not to pay back this borrowed money, the market would crash, and all traders would lose money. It is why CFDs are considered a leveraged product and should be treated with caution and only used by sophisticated investors/traders.
What else do you need to know?
Like share trading, you must pay close attention to the news and market updates. If ASX announces a significant earnings result, that will probably crash or spike your CFD. It is why it may be annoying having CFDs because whenever this happens, you’ll lose money during manual trading (because broker’s don’t place limit orders for small movements).