A stock CFD is an acronym for a Contract-for-Difference. A trade of this type takes place through a broker and involves the difference between the current price and the price when you close out your position as your profit or loss. They may sound complicated, but they are pretty simple to understand and provide great flexibility and risk/reward opportunities for many traders. CFD trading Australia involves trading CFDs on various stock markets such as the Australian Securities Exchange (ASX).
And if you’re from the UK, then you can trade Centrica share CFDs or other stocks of British companies listed on the London Stock Exchange (LSE).
There are two ways that you will be able to utilize a stock CFD: Through Shares or Margin Trading.
Using Stock CFDs Through Shares
With this CFD method, you purchase an actual share of stock (through a broker) rather than going short on it by selling shares first. To do this, you will need to open a broker account and have enough money in the bank to cover the trade cost, which you would then purchase or sell at prevailing market prices. You can hold onto your share until its price fluctuates to make a profit or close it out before that time if you are looking for a quick return. Shares also give you voting rights when it comes to company policy.
Using Stock CFDs Through Margin Trading
The other way is through Margin Trading, where you are trading stock CFDs with leverage provided by your brokerage instead of purchasing shares outright.
There is no need to own an actual share of stock with this method to buy/sell CFDs. Instead, you will trade on margin and open positions with a leverage typically anywhere from 1:1 – 3:1 (the maximum amount of leverage that your broker can provide). You also do not need to set aside any collateral for the trade since it requires opening only part of a position. To close out your position before maturity time, all you have to do is sell/purchase the stock CFD, so the difference between what you paid and received becomes your profit or loss after commissions fees are taken out.
You can find many instances where this type of trading may be beneficial. For example, utilizing a 1:1 margin can help you purchase an emerging market index with very high volatility since the cost of one unit will only be around $10. In contrast, it represents companies from all over the world. This allows traders to diversify their portfolios with minimal risk while retaining flexibility when trading different markets.
Another instance where this method may come in handy is when stocks are not doing well but then see a sharp increase in price due to some significant events that cause fluctuations across many indexes or sectors at once (financial crisis of 2008, for example). When this happens, stock CFDs allow you to take advantage to make money without waiting for prices to settle down (which could take weeks or even months) or buying individual stocks. There are many other scenarios where stock CFDs can be used, but it is up to you to decide if they are the right choice to maximize your profits.
These types of trading can be very risky, so traders themselves must do their research when deciding which broker will work best for them in terms of rates and fees since some great ones are out there that are competitively priced.
You can then determine whether a margin account or a regular cash account will be best suited for your financial goals.
What Are the Benefits of Using Stock CFDs?
- Less Risk: you can diversify your portfolio by trading on margin with stocks all over the world.
- Significant Gains: access important global financial information that can cause large price movements, allowing you to make significant gains in a short period.
- Flexibility: There is no need for collateral or owning an actual share of stock to trade CFDs; just open positions and then close them out before the maturity date.
- Better Returns than Savings Accounts/Cash-Accounts: generally pay less interest than savings accounts, but more than cash accounts (depending on the brokerage).
