Profits made on the stock market are common knowledge. However, you do not have to own physical shares to profit.
With Contracts for Difference known as CFDs, anyone can benefit from market changes, managing long-term and short-term trades from the comfort of their home.
Keynote: What is a Share CFD?
A contract for difference (CFD) lets traders speculate on how the market price for a stock or financial asset. Trading this asset without actually owning the underlying asset. CFDs can be used to trade shares, commodities, and forex, among other things.
The Concept of CFD Share Trading
CFDs are widely used in the realms of indices and commodity trading. In any case, the arrangement is based on a contract between a buyer and a seller.
Its subject is price movement, with no actual ownership involved. Upward and downward trends on the market allow you to speculate on the dynamics and monetize your foresight.
Keynote: How do CFD stocks get traded?
There are two trades in a CFD. The open position is made by the first trade, and it is later closed by a reverse trade with the CFD provider at a different price. If the first trade is a buy or a long position, the second trade, which closes the open position, is a sell.
Zero Physical Assets
To trade CFDs, one does not have to be a shareholder. No physical exchange is involved. Positions are opened and closed via a digital platform, and all operations are conducted remotely. While CFDs on currencies involve no actual cash, CFDs on shares do not require you to purchase actual stocks. Price dynamics are all you need to be knowledgeable about.
Traders open short or long positions relying on the same logic that applies to currencies.
For example, if you expect the price to collapse, you should sell the asset quickly by going “short”.
This will allow you to buy back more of the same asset once the price rebounds.
On the other hand, a player expecting the instrument to gain value will do the opposite. A long position enables you to wait for the most favorable trading conditions.
CFDs vs. Physical Shares
Businesses attract investor capital by selling their shares on the global stock market. These are bought as physical assets, giving the buyer ownership of a percentage of the corporation.
The profit is then derived from the dividends and sale of the stock following a hike in its value.
What is the difference between CFD and shares?
The main difference between trading CFDs or contracts for difference and trading actual shares is that when you trade a CFD, you bet on the price of a market without owning the underlying asset.
When you trade shares, on the other hand, you have to own the underlying stock or a fraction of it.
However, with modern brokers, the need for ownership is no longer there. Speculation on share price alone translates into actual monetary gain. The system is thus simplified. It requires special software and internet access.
The Advantage of Leverage
The purpose of the tool is to boost your buying power. It is widely used in currency exchange, as well as trading of CFDs on commodities and indices.
In essence, a trader has access to larger trading volumes, as they can use a portion of their broker’s funds. While maximizing potential gains, the option may also cause more dramatic losses, which should be remembered.
No Shorting Restrictions
In some markets, you may not go short unless you borrow a financial asset. The margin rules for long and short positions may also differ.
However, when shares are traded as CFDs, shorting is allowed at any time with no borrowing costs incurred. After all, the assets are not owned by the price speculators.
Other Benefits to Consider
- Convenient trading time: as long as the market is open (i.e. around the clock 5 days a week).
- Trading volumes: lot sizes are determined by you.
Regulated Online Brokers for Share CFD Trading in India
Alexandra is a professional writer with an extensive background in the financial markets. Alexandra started out in the financial industry in 2011 and trades forex, stocks, and cryptocurrencies.
Alexandra also writes technical and fundamental market analyses. Alexandra also tests forex brokers’ trading platforms and crypto exchanges and writes forex broker reviews.