If you have been trading stocks and are amazed at the brokers fees that you need to pay every time you make a trade, it might be time to do CFD trading. But what is CFD trading and how does it work?
CFD means Contracts For Difference and it is a contract that you enter into with the broker. Instead of buying and owning the underlying asset, the contract binds you to a loss or a win depending on the movement of the price of the asset.
There are many advantages of CFDs over owning stocks directly. For one, you can trade at a high margin. With a stock broker, you are only allowed to trade at a margin by 50%. So, if the price of a stock is $50 and you decide to buy 100, you need to pay $2,500 to execute a trade. With a CFD, though, your margin can be as low as 5%, and you would only to pay $250 to the broker.
But low prices aside, there are other factors about CFDs that make them attractive to many investors. One is that the brokers are not tied to a stock exchange. If you search for CFD brokers online, you will see that there are many brokers out there.
None of them are connected to the NYSE and other exchanges. This is really a double-edged sword. While you can trade any time no matter where you are in the world, there is always the risk that the broker is less than reputable and will try to squeeze you out of your money without giving anything back. But then again, brokers do not stay in business by scamming people of their money.
Anyway, if you want to try CFD trading, there are a few factors you need to consider when choosing a broker. Aside from the reputation, compare the bid prices. Bid prices for CFDs are always lower than the price of the underlying stock. For example, the bid price may be $25.76 at the stock exchange but is only $25.74 with a CFD.
When the price moves, the profit of a CFD contract will be lower than the price of the stock, and you would need to have the price move really high to realize really big profits. But this isnt something to be upset about because of most of the time, the stock exchanges are only profitable by a few dollars, and you need to pay brokers fees (CFD brokers do not charge a commission).
CFDs are different from binary options in that the profits are calculated based on the price movement. With binary options, the profit is already set and you only need to guess correctly whether or not the price of a particular instrument is going to move up or down against the strike price after a certain time.
If you are interested in trading CFDs make sure you understand how it all works first before taking out your credit card to make a trade.
For more ideas read our guide on make moneny on eToro which provides indepth details about how to invest in forex, stocks, CFDs and indecies by copying other professional traders.