0

Before getting into CFD trading these are the Important concepts and issues that need to be understood.

Brokerage fee or charge commission

CFD providers charge a percentage of the total trading as brokerage fees or commission. This could also include hidden charges. Most CFD providers charge between 0.1% and 0.5%. The lesser the brokerage fees, more is the money saved. Choice should be made accordingly.  

Margin Requirements

A CFD provider with lower marginal requirements should be given more preference, although there is a 10% to 20 % limit on them. A person has to pay an exclusive percentage of the margin’s value because CFDs are leveraged products. Other factors to be kept in consideration are the interest charged on money borrowed for short and long positions. 

Trading system and customer service

A good way to find out the difference between a bad or a good CFD broker is to observe the trading system and customer service. Go for a broker whose trading system and customer service is better in terms of simplicity, reliability and design.

Reputation

Don’t forget to check the reputation of the CFD provider. It helps in comparing different brokers. Regulated CFD brokers are the best bet.

Cash management
Cash management is the right way to protect your trading capital before you even make an entry into the actual trade market.
Cash management generally refers to the amount of money allocated for each trade. This process of money allocation is also known as position sizing. In layman’s term, it means your money management skills should help you estimate the amount of money that should be put in trade according to the expected return or risk. For instance, you may only want to put in $2,000 on a certain trade because you don’t expect a big return. Whereas, you might put in $9,000 on another trade because you think it has potential for generating higher returns.  

Choosing a CFD trading strategy

Short Term Trading

Hedging

Pairs Trading

Tax Efficient Trading

CFDs enable you to control the time of realizing capital gains and losses, which in turn could reduce tax liability. This is because you can sell CFDs against your physical shares holding, without crystallizing potentially taxable capital gains.

Risk management 

Opening a CFD position is just one area of trading. It is very important to correctly manage your position, so that trading goes accordingly and you have ample time to bail out if things are not going your way.
CFDs have their own share of benefits and risks, and you need to be aware of them. Risk management is quite crucial in CFD trading. Certain types of orders can help you manage CFD trades efficiently, such as Stop-Loss Order (SLO), Guaranteed Stop-Loss Order (GSLO), One Cancels (the) Other (OCO) and If Done Order. (These are discussed in more details below, under in the section CFD order types)

Understanding cost 

The cost of CFD can be divided into:

Commission

This could be the trade size’s percentage. Certain brokers have no commissions. But then you must remember their spreads are widened and are not the underlying stock prices.

Spread widening

Interest costs

Slippage

Other fees

Some brokers take platform fees or monthly data fees in addition to the costs mentioned above. Your fees could be lowered if you make more than a certain number of trades per month.

CFD order types

Market order – This is an order for buying or selling CFD immediately at the current market price.

Limit order – This is an order to sell CFD if the price trades is same as or above the limit price.

Stop-Loss Order (SLO) – This takes you out of a trade if the price of CFD moves against your predetermined stop-loss level price. Electronic trading softwares should be used to place your stop-loss order whenever you open a CFD position.

Guaranteed Stop-Loss Order (GSLO) – This guarantees that the CFDs are bought or taken out at a pre-determined price, even if there is a wide gap in your CFD share price. GSLO can be placed through phone calls to the CFD provider. The guarantee provided on GSLO is a premium service therefore you have to pay a small sum to use it

One Cancels (the) Other (OCO) – This is an advanced order that links two orders. The execution of one order automatically cancels the other order linked to it. OCoO links a limit order with a stop order.

If Done Order – Like the OCO, this too links two orders. However the difference lies in the fact that on execution of the first order, the second order is automatically entered into.   

CFD trading tax 

CFDs can be sold against physical shares holding without crystallizing a potentially taxable capital gain. This helps in reducing tax liability because you gain control over the time at which capital losses or gains can be crystallized. Capital gains tax can be subjected on CFD gains. Income tax can be levied on dividends at a marginal rate.