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What is CFD trading? 

CFD, or Contract for Difference, is a contract or agreement between a provider and an investor that works on the opening and closing price of shares. The main idea of CFD trading is to make profits from changes in the price of stocks and shares. It is a way of trading on the price movements of financial markets all over the globe, without actually engaging in direct buying or selling of the underlying asset.

What is CFD trading? 

CFD, or Contract for Difference, is a contract or agreement between a provider and an investor that works on the opening and closing price of shares. The main idea of CFD trading is to make profits from changes in the price of stocks and shares. It is a way of trading on the price movements of financial markets all over the globe, without actually engaging in direct buying or selling of the underlying asset. 

CFD trading gives an opportunity to make profits from a wide array of markets that include commodities, currencies, indices and equities. CFD trading is a more flexible option than traditional trading. This is because they can be used to speculate on upward or downward price movements.  

CFD vs. Share trading 

CFD trading is quite similar to share trading. If a trader does not want to sell shares/stock and wants to profit when the prices drop, then CFD can be used as a hedge against the share  One of the main differences between CFD trading and share trading is that in the former the traders can get potential benefits from both rising and falling markets and share prices. CFD trading provides an investor with various trading options.  Another point of difference is that, in CFD trading the investor does not actually own any shares or rights attached to those shares. So there is no right on voting rights or dividends, but at the same time the CFD price will change to reflect dividends. It is this trait that allows the increased leverage. So basically a CFD enables a trader to hold a theoretical position without needing to stump up the full value of that position in the beginning.  In CFD trading, the market can be long or short just like spread betting. The trader receives interest on going short. CFD trade has no expiry dates. Typically, a deposition of 5% to 20 percent is needed for trading CFD. 

Advantages of CFD trading

The use of leverageThere is a 20 to 1 or 10 to 1 leverage available with CFD providers and brokers. This implies that your return can be magnified by 10 to 20 folds. As a result, more profits can be made with smaller floats.More stocks can be short with CFD trading than share tradingYou have more buying and selling opportunity with CFD trading. If your system is profitable over a shaky market then you can take advantage of a market that is going up or down.  Trade shorter time framesMore profits can be made from smaller moves in the underlying stock prices because of the availability of leverage and the ability to short CFDs. So basically you don’t have to hold onto positions for long timeframes in order to make profits.Automatic stop lossesAutomatic stop losses for CFD positions can be placed on your CFD trading platforms. This can be helpful in two ways.

Firstly, automatic stop losses will allow you to exit a trade automatically within an intraday. There won’t be a waiting period till the end of the day to see if the stock price has gone beyond the stop loss mark. This results in an improved profitability of systems which doesn’t let your losses run because of an averted slippage.

Secondly, it is easier for traders to follow a mechanical system because of automatic stop losses. The exits are done automatically and not at your discretion. This again leads to improved profitability.All orders can be placed in the eveningThis is especially beneficial for all the people who work in the day, which in fact is the majority of the segment. CFD trading makes it possible to trade in the evening. There is no stamp duty on CFD and a single account can give you more access to a greater range of financial markets. CFDS enable you to maximize your trading capital because they are traded on margin. Stop losses and Limit orders can be used to limit and manage your risk in CFD trading.  

Over the counter vs. ASX CFD trading

The majority of CFDs are traded over the counter using the market maker or direct market access model. ASX CFD trading was introduced in 2007, and it trades a small percentage of CFDs. ASX CFDs are usually offered on a limited number of shares and not all shares on the exchange. The cost of ASX CFD trading is higher than over the counter trading. Some of the extra charges include ASX fees, wider market spreads and broker commissions.

Fees and Charges of CFD trading Commission free CFD trading 

Normally a commission of 0.14% on the total value of CFD is charged. Charges are made on both opening and closing a transaction. Some providers quote real prices with no added hidden charges to the offer/bit spread. Fees are however levied separately. Quite a few providers offer commission free trades, however in most of these cases the cost in all probability is factored into the spread.  Traders should be aware there are two types of CFD providers. One type is like a traditional spread better. In this case, you are trading with the CFD broker and hence have to trade on their prices. This type of a broker is more prevalent and will charge a lower commission.  The other type of provider directly sends the hedge for your CFD orders the LSE order book. Therefore, you can send a limit order on buying the bid or selling it. In this case, you can avoid paying the spread if someone decides to hit your bid or lift your order. These providers usually charge more in commission.   

Level of Margins required

The margin requirement is the deposit that is required in lieu of each open bet on the account. A trader must have enough funds to cover the margin requirement applicable on that trade, when the trade is placed. Margin requirement deposit levels should also be maintained above any profits or losses on a trader’s account.  A trader needs to only pay an only percentage rather than the full value of a transaction when opening an initial margin position. The margin requirement is expressed as a proportion of a trader’s position and varies according to price changes of the traded contract. A margin call can occur when an investor is required to deposit additional funds. This ensures that the account valuation is above required margin levels to support the investor’s open positions.

Cost of guaranteed stop loss 

A GSLO, or Guaranteed Stop Loss Order, is a risk management order type. It allows an investor to set a price that is guaranteed irrespective of whether the market trades at that price or not. The advantage of this is that the risk of price gapping above or below a regular stop loss order is eliminated.  A guaranteed stop loss is designed to reduce volatility of a trader’s portfolio during volatile times or when the trading stocks have a tendency of gapping. GLSO is a stop that limits an investor’s worst case scenario when trading CFD. Generally, a GSL can be put from 1% - 5% away from the current price. Most CFD providers prefer you to place this trade over phone. This is because not all guaranteed stop loss orders are accepted. Many a times, your CFD provider may face the brunt if a loss takes place due to gapping in the CFD trade. So basically CFD providers take an additional risk and therefore they can charge you a premium for placing this trade. Your CFD broker can charge upto 2 to 5 times the cost of normal brokerage. The actual price charged varies from broker to broker. This additional cost should be viewed as an additional insurance policy on a trader’s CFD account against large losses.

Learning CFD trading 

CFD trading simulators

CFD trading simulators give traders hypothetical money for practicing trade. Simulators are extremely beneficial for learning the tricks of the trade without making any actual monetary losses. This way the actual trade can be entered inly only when you think you are thorough with the concept of CFD trading. You can choose to practice in global market indices and Australian equities with CFD trade simulators. A variety of underlying tools in the CGD trading simulators helps you to build interactive investor CFD portfolios. The simulator also lets an investor check the last trade and monitor open positions. You can choose from a variety of CFD trading simulators found online. CFD trading simulators are not only beneficial for beginners, but also for those who are already in the business but think they can do with more practice.

CFD trading demo 

The fastest way to get started with learning about the CFD trade market is to sign up with a CFD trading demo. You can practice trading on it till you think you are good for the real thing. There are a lot of online providers who offer demo accounts; you can sign up with one of those. However, do not forget to research and compare before signing up with one. CFD trading demo is quite similar to a live variation of paper trading. Using a trading demo, to understand the rules of the trade, is quite cheap. It does not actually lead to any actual monetary losses because the money used is basically hypothetical. So you don’t have to worry about putting in real cash. You learn how to place orders, and when to enter or exit trading. Using a CFD trading demo has quite a good number of advantages. Therefore, a trader should make full use of it.