CFD trading on stocks is gaining more and more popularity among traders, attracting the attention of both beginners and professionals. What is the secret of such popularity of this tool and why is it worth adding it to your trading arsenal?
CFD contracts appeared on the UK market in the 80s of the last century for use in speculative trading and since then have taken a firm place in the trading industry worldwide. On the German market, for instance, the process is called CFD Handel, while the CFD abbreviation itself means Contract for Difference.
The need for their development was necessitated by the fact that an increasing number of participants began to appear on the market, seeking to profit from financial instrument speculation – purchase cheaper, sell more expensively, and vice versa. Stocks and futures were inconvenient for these purposes.
Advantages of trading CFDs on stocks
At the moment, CFDs for shares have gained the interest of currency traders, and most brokerage companies allow trading CFDs for shares in parallel with the currency within one trading account.
This approach combines simplicity, convenience, and the possibility of diversification, which is important for reducing risks in independent trading and investing.
So, what do you need to know before adding CFD contracts for stocks to your trading arsenal?
- First of all, they completely replicate the dynamics of the underlying asset’s quotes, allowing you to earn the same return on price movement as when trading equities directly on the stock exchange, but at a lesser cost. At the same time, if you have learned how to make money in the foreign currency market, it will not be difficult to apply your trading method to stock instruments.
- Secondly, trading costs are significantly reduced if you trade CFDs on these securities instead of stocks on the stock exchange.
A wide range of assets within one brokerage company
Whether you are an experienced trader or are just learning the fundamentals of stock trading, the availability of a diverse variety of stocks from numerous worldwide corporations allows you to select those that best suit your trading approach.
At the same time, in the case of working with a CFD broker, you can earn on the price difference of both American and European companies within the same trading account and in the same trading platform.
If you wanted to speculate on all of these assets directly on the stock exchange, you would have to open accounts with different brokerage firms that provide access to a specific market, and you would have to suffer the fees of using the trading platform in each of them.
Ease of opening an account
Most brokerage houses that provide access to CFD trading have a very simple procedure for opening an account, depositing, and withdrawing funds. Such a process may take a maximum of several days, and you always have the option of selecting the most trustworthy firm, with whom you will not have to worry about your assets.
For comparison, to open an account with a stockbroker, you will need a large package of documents, and sometimes it can take from several weeks to several months. It is also worth noting that by trading on the stock exchanges of the USA or trying to master your skills in CFD Handel on the German trading market, even buying shares for speculation, you become the holder of this security, and according to the legislation of these countries, non-residents do not have the right to do so.
It is tough to even gain access to trading international equities. And if all you want to do is profit from the difference in the values of these assets, CFD trading is just what you need, as it helps you to achieve your financial goals without any unneeded complications.
Choosing to trade CFDs on stocks, you get the opportunity to use the broker’s leverage. Most CFD brokers provide the opportunity to margin trade stocks with a leverage of 1:5 for free. This means that having even a small amount in the account, you can purchase more shares, which means that your profit in the deposit currency on the same price change will be a multiple of more.
And finally, when trading CFDs on stocks, you get an adjustment for dividends when the company issuing the underlying asset pays dividends on its securities. This means that if at the time of payment of dividends, you have opened long CFD positions on this paper, the amount specified in the broker’s instrument specification is additionally credited to your account. As a rule, it is equal to the amount of dividends on the stock.
Thus, by choosing contracts for the price difference for speculative trading, you get the opportunity to make money on stock trading without unnecessary costs and organizational difficulties. And you can use the saved time to improve your trading strategy.
If you are an experienced trader, you will be able to enhance your set of trading instruments by adding stocks to them in this manner. If you have ever worked on a stock exchange, you will appreciate the ease and convenience of speculative trading in CFD contracts.