Trading CFD on stocks is becoming increasingly popular among forex traders, catching the attention of both newbies and professionals. What is the secret behind this tool’s popularity and why should you have it in your trading arsenal?
CFD which means Contract for Difference emerged in the UK market back in the 1980s in order to be used in speculative trade.
The need for their creation was driven by the fact that an increasing number of players started appearing in the market with the intention of making money on speculation i.e. buy financial instruments cheaply, sell them more expensively, and vice versa. Traditional instruments, such as stocks and futures were not exactly handy for this.
1. CFD trading benefits
2. Wide selection of assets offered by one brokerage company
3. Simple account opening procedure
Currently, CFDs on stocks have sparked interest among currency traders. Most brokerage firms providing their customers with access to the Forex market offer an opportunity to trade CFD on stock along with the currency on one trading account.
This approach brings together simplicity and convenience, apart from asset diversification possibilities which are essential for risk mitigation in individual trading and investing.
So, in case you are already trading Forex, what do you have to be aware of before you add CFDs on stocks to your trading arsenal?
First of all, they fully replicate the dynamics of the underlying asset’s quotes which makes it possible to receive the same profit on the price movement, just like when you trade stocks directly on the stock exchange, but with less expenses. On top of that, if you have learned how to trade Forex, adapting your trading system to the stock instruments will pose no major difficulty.
Second of all, unlike trading stocks on the stock exchange, the expenses associated with trading are much lower when you trade CFDs on these securities.
To put this in perspective, the expenses linked to payment for the trading platform in order to work with securities is about 5-10% of the deposit (if your trading account is up to $5,000). In such a case, your trading system has to generate from 60% per annum just to cover the expenses.
In this respect, it goes without saying that CFD trading offers a major advantage, since most brokerage firms give the opportunity to trade these instruments on free platforms, such as the most popular MetaTrader 4.
However, it should be noted that when trading CFDs on stock, the swap charges for keeping the position open overnight will apply. When opening the long positions, the swap will be about 4% per annum, and about 12% (by the deposit size up to $5,000) when opening the short ones.
Since the usage of the trading platform is free of charge, these expenses are rather small, especially considering the fact that the minimum deposit size should start from $25,000 in order to use the trading strategy which involves holding the open position overnight on the stock exchange.
CFD trading has a ton of advantages as compared to trading of the underlying assets.
Whether you are an experienced trader or someone who is just starting to figure out the very basics of exchange trade, the availability of a wide range of stocks of the global corporations allows you to pick those which are best-suited to your specific trading strategy.
In addition, if you work with CFD broker, you can make money on the difference in the prices of both American, European and Russian companies using the same trading account and one trading platform.
If you wished to trade these instruments on the stock exchange in a speculative manner, you would have to open accounts in different brokerage firms that provide access to a specific market, and on top of that you would have to bear the expenses associated with the use of the trading platform in each of them.
The majority of brokerage houses which offer CFD trading options have a very simple account opening, as well as replenishment and withdrawal procedures.
The account can be opened in the «Personal Account» on the company's official website. To get verified, all you have to do is provide a scanned copy of passport or other ID, a document confirming residence registration, and a photo of the bank card or payment instrument, from which the funds were replenished and where they will be withdrawn.
The whole procedure may take a few days at most. You can always pick the most reliable company where you won’t have to worry about your money.
For instance, cooperating with FinaCom PLC LTD, Gerchik & Co insures the money of its customers, providing compensation payment within the framework of the insurance fund amounting to $20,000.
To put that in context, in order to open an account with a stock broker, you will need a huge set of documents, and the whole procedure may take from several weeks up to several months.
It should also be noted that when trading on the stock exchanges of the United States and Europe, and even buying stocks for speculation, you become the holder of that security, whereas pursuant to the legislation of these countries, the non-residents have no right to this.
Getting an access to the foreign stock trading is quite challenging. If you are only interested in profiting from the difference in the prices of these assets, CFD trading is just what the doctor ordered, since it allows achieving the desired result without any problem.
If you decide to trade CFD on stock, you get a chance to use the broker’s leverage. The majority of CFD brokers offer the opportunity for margin trading of stock with 1:5 leverage charge-free.
This implies that you can buy more stock even while having only a small amount of funds on the account which means that your profit in the deposit currency on the same price changes will be significantly bigger.
If you wish to raise margin funds for trading on the stock market, marginal lending will cost you 15-16% of the obtained sum of money. Another advantage of CFD trading is the possibility to split the lot.
The standard lot size is 100 stocks, and when working with contracts for difference, you can purchase 60 and 80 pieces or any other required quantity.
Last but not least, when you trade CFDs on stock, you get a dividend adjustment when the issuing company of the underlying asset pays dividends on its securities.
This implies that if you have long positions on CFD on this security on the date of dividend payout, the amount indicated in the broker's instrument specification will be credited to your account additionally. Typically, it is equal to the amount of stock dividends.
As can be seen from the above, when choosing contracts for difference for speculative trading, you get a chance to make money on stock trading without incurring additional expenses and experiencing organizational challenges. The time saved you can then use to improve your trading strategy.
If our article has fueled your interest in trading CFDs, first, you have to open an account with the CFD broker. Notably, Gerchik & Co offers its clients a wide range of CFDs on stocks, while ensuring accurate stock quotes provided by the best liquidity providers, along with funds security.
Once you have created a trading account, you can proceed to trading, having picked those CFDs on stock that are perfectly-suited for your trading strategy.
If you are an experienced trader who traded Forex before, you will be able to expand the list of your trading instruments by adding stocks to it. If you have traded on the stock exchange, you will definitely appreciate the simplicity and convenience of speculative CFD trading.