As a CFD stock trading beginner, there are many things you should familiarise yourself with. Contract for difference (CFD) provides a way for two parties to agree to pay the difference in the asset’s price occurring between a trading position’s entry and exit points. With this type of trading, you don’t have to own the given asset. You can earn from its price movements by merely predicting the directional changes via a regulated broker.
For this reason, stock CFDs provide a perfect hunting ground for inexperienced traders. So, you could earn the difference in the price movements of a company’s share price without owning any shares. One of the reasons why CFD trading is attractive to many traders is access to leverage. In this case, you commit a portion of an asset’s cost, and your broker covers the rest.
This kind of leverage allows you to open a large trading position without paying for the entire transaction upfront. The broker stipulates the fraction you must pay before taking the position via the Metatrader4 platform. In many cases, the percentage you pay ranges between five and 20 per cent of the asset’s full price.
Top stock CFD trading tips for beginners
If you want to make the most of your stock CFD trading, it’s always prudent to take advantage of stop-loss orders. That way, you don’t have to worry about losing all your money if you predict asset price movements wrongly. This approach makes it easier to protect your trading balance, allowing you to open new profitable trading positions.
At the same time, you don’t need to keep an eye at all your open positions in real time. Another important step is to spend considerable time testing your stock CFD or share CFD trading skills through a demo account before switching to a real money account.
Demo accounts only use virtual money under real market conditions. These accounts give you a glimpse of how it feels to open real trading positions.
Another key point to remember is limiting your leverage in stock CFD trading. Larger leverage can squeeze you into a tight corner in the event that share prices start moving against you. With limited leverage, you’ve got breathing space to cut your losses and close open positions without owing the broker large amounts.
Also, don’t forget to implement an effective share CFD trading strategy to maximise chances of earning profits consistently. Many stock CFD trading beginners like to cut corners and avoid formulating a strategy. Doing so can really compromise your trading experience.
Winning with stock CFDs
Contract for difference markets list two prices: offer and bid. The spread refers to the difference between these prices. You can liken them to spread bets associated with sports betting. When you take a stock CFD position, you get the opportunity to define the size of your trade. As a result, your profit increases in tandem with asset price changes.
For instance, if you buy six share CFD contracts and the stock exchange rises by 40 points, you take home $240 in profits. On the contrary, if the market moves in the opposite direction by the same amount of points, you lose $240.
You benefit in various ways when you choose to trade these CFDs as a beginner. Tax efficiency is a key factor because you don’t have to fret about paying capital gains tax on your earnings. Another thing is the flexibility associated with rising and falling markets. That way, you can treat them as spread bets.
Many traders find stock CFDs attractive because it’s possible to control a large value position without committing a large amount to a particular trade. On the other hand, you can use them as a hedging option by making up for losses from physical investment.
You can view a contract for difference as a margined product because you open a position at a fraction of the asset’s total cost. However, leveraged trading requires an extra careful approach due to the potential for larger losses, depending on the size of your leverage. When handled correctly, this type of trading can yield increased returns.
Remember, market volatility is always possible and can make a difference in your trading experience. So, implement relevant strategies that take cognisance of all market possibilities. That way, you can yield the desired results from your stock CFD trading.