Learn How to Trade Online Stocks with CFDs
Instead of investing in a company’s publicly traded stock or buying stock online, it’s quite easier to trade CFDs. CFD is a Contract for difference or an agreement between a buyer and a seller to exchange the difference between the opening and closing price of an asset. CFDs facilitate the speculation on various markets such as stocks, currencies and indices.
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A look at the advantages of trading stocks with CFDs
When trading stocks with CFDs, you don’t own any company shares but merely speculating on their future value. Even the smallest movements in the price of online stocks can incur great profits because CFDs are traded on margin. This allows for huge short-term profit opportunities compared to traditional investments in the stock market where one must wait for the company’s stock to appreciate in value and then sell each stock at a marginally increased price.
Typically, one CFD is equal to one stock and the price of a CFD is based on the price of the stock itself. However, because CFDs can be traded on margin, you don’t need to pay the full price to hold the same number of stocks. If one stock in Amazon is worth USD 320 for example, you would need 3,200 to buy 10 of them. With online stock CFDs though and a 5% margin you would only need USD 160 to trade with the same number of shares. Also, due to the fact that CFDs aren’t traded over a traditional stock exchange, you can trade online stocks 24/7 without worrying about opening hours.
Another limitation of traditional stocks is that when their value depreciates you either lose a part of your investment and get out before it crashes, or you can hold in hopes that it will come back up again. With CFDs however, investors can open a sell position or go short on a stock just as easily as they can buy. This presents profitable opportunities no matter how the company is performing. As long as you can identify a trend, whether that is going up or down, you can make a profit. Especially if you are trading on margin, but it should be noted margin trading is risky because, in case of a bad trade, you can lose more than your initial investment.
Another thing to watch out for is volatility. Similar to leverage and margin, the high volatility in CFD markets is why the opportunity for both profits and losses is so great in trading stock online and all other asset classes as well. Sudden spikes in volatility such as those during high-impact news announcements regarding a company’s stock, can see the price of the CFD come crashing down in milliseconds. These sudden spikes are a godsend for opportunistic traders though who wait for such news to snag hefty profits from these sudden market movements.
Is trading stocks a good investment?
Online stocks and CFDs are a great investment product for those who are willing to put in the work and acquire an understanding of the market both in a micro and macro scale. It is a high-risk investment market, however, so do not trade with amounts you can’t afford to lose.
See below some of the characteristics of the stock CFD market:
- Ideal market for short-term returns
- Flexible investment options
- Very accessible with low minimum deposit limits
- Low fees and commissions
- Higher-than-average learning curve
What to expect when trading CFDs
The first and most crucial step before you start trading stocks is to find a reputable and trustworthy broker. Make sure that before you open an account, you find a broker that is regulated and licensed in order to ensure that your investment is in good hands and most importantly that you will be able to make withdrawals without too much hassle. Online reviews are always helpful in weeding out the scammers.
After you go through the pesky process of opening an account and getting approved – going through the arduous approval process is a good thing since it means your broker follows the industry requirements set by the regulator which protects everyone from unlawful activities.
Getting the bureaucracy out of the way leaves you with downloading the trading platform available at your broker of choice and deciding which online stocks you wish to trade. Depending on the trading platform, some options may vary, but essentially you just need to open a long or short position. That means you will either buy or sell the stock online through your broker.
While you are placing an order to open a position, you should also be presented with additional options which help greatly with risk management. Or in other words, minimizing your losses and protecting your money. These are the stop loss and limit orders which are instructions to close the trade if the stock reaches a price you are not comfortable with, but it can also be used to lock in profits in case the market starts falling after hitting your target.
Trading stock CFDs is more favorable than a traditional stock exchange broker but it is a highly volatile market with a lot of pitfalls for beginner traders. Ask your broker about trading on a demo account before you invest any real money and spend enough time educating yourself before you start trading.
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