CFDs is a short hand term for ‘Contracts for Difference’, and is a stock market product which delivers great earnings potential for investors. Basically, when you trade in a CFD you don’t buy or sell the physical stock – in other words you don’t own the stock itself, just an interest in it. For example – if you purchase a CFD on a particular stock, if the stock goes up in price you’ll still make a profit as if you owned the actual stock itself!
CFDs aren’t available on all stock markets world wide – they’re not traded on the U.S. markets for example. They originated in Great Britain and have spread to other European markets, as well as the Australian Stock Exchange. Widely used by institutional investors, they have the capacity to deliver good profits over the long and short term, for minimal outlay. Purchasing a CFD is much cheaper than purchasing the actual stock itself, and therefore is a great way to start trading on the stock market without any great capital outlay.
The cost of a CFD depends largely on the price of the underlying share. The exact cost will depend on the brokerage firm that is used to trade the CFD. Most brokers will charge on a percentage basis – for the cost of the CFD (depending on the cost of the underlying share) plus a brokerage fee. It is important that when calculating your entry and exit prices you take these fees into consideration. Otherwise you may think you’ve traded out on a CFD with a small profit only to find that after fees are charged you have actually traded at a loss!
If you don’t like risk, then CFDs are for you! Remember that trading on the stock market in any form carries with it an inherent aspect of risk – but if you’re risk adverse like me, then the smart thing to do is to take steps to minimise the risk where possible! One way of doing that is setting what is called ‘stop losses’ – which is what it says – it stops losses. When you purchase for CFDs, make it a habit to always set a stop loss – a price at which you automatically trade out your CFDs. This allows you to set a figure on what sort of trading loss is acceptable to you, and avoid getting wiped out! Conversely, you can also set an upper limit on the CFD – a point at which you will sell your contract at a pre-determined profit!
There are many tools and much information available on CFDs, and any brokerage firm worth their salt will be able to trade in them. Shop around for the deal that best suits you. Teach yourself the language and basic concepts surrounding the stock market and CFDs so as to be in the best possible trading position. And remember – take steps to minimise risk – you won’t regret it.
Author Resource:-
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