Contracts for difference give the opportunity to gain from shifts in share prices. Here are the fundamentals of this money-making arrangement.

What is CFD Trading on Shares

Today, Forex traders in the UK have a wide range of instruments in addition to currency pairs. Buyers of CFDs, or contracts for difference, derive profits from changes in prices for the underlying assets. Here are the fundamentals of CFD trading on shares. This tool is valuable, both as an addition to currencies and on its own.

Explanation of the Concept

The arrangement, also applicable to commodities and indices, is based on a contract between a buyer and a seller. The subject of this agreement is price movement. Whether the market is rising or falling, you can speculate on the dynamics and monetize your finance skills.

There are several similarities between CFDs on shares and conventional currency trading on Forex. Although the traded assets are different, the underlying logic is essentially the same. Consider these features.

1.   No physical assets

Neither currency trades nor CFDs involve deals on a physical exchange. All operations are executed online through MetaTrader — a cutting-edge platform with powerful analytical tools. Traders of currencies do not deal with physical cash, while holders of CFD do not own any actual stocks. In both cases, the profit is based on price movements only.

2.   Costs of trading

In both cases, the cost of a transaction is referred to as “spread”. The difference between “Ask” and “Bid” values, it constitutes the commission paid to the broker.

3.   Different positions

Both currency and CFD traders may open either “short” or “long” position on their assets. If the prices are expected to fall, a player will sell quickly, so bigger volumes of currencies or shares may be bought back later. Expectations of appreciation, on the other hand, cause traders to “go long” when they buying wait for favourable selling conditions.

4.   Same software

The MetaTrader platform, which is the top choice for Forex trading, is just as suitable for CFD strategies. Hence, you may add a new tool to your portfolio and manage it in a familiar virtual environment.

CFDs vs. Stocks

The shares that companies sell on the global market may be purchased as physical assets. Through investment, every shareholder owns a percentage of the corporation. This conventional scheme gives opportunities for profit. First, the dividends and secondly, the benefit from selling stock after a rise in its value.

Forex brokers, such as FXTM, allow you to speculate on share prices with no need for actual ownership. It is a simplified system, which is purely price-based. Aside from the accessibility, part of the appeal lies in the leverage conditions. Here are a few key aspects.

1.   Leverage

Just like in currency trading, the option maximizes your buying power. Rather than being limited by your balance, you may boost your trade with borrowed funds. In CFDs, the correlation of higher possible returns and higher possible losses is just as vital.

2.   Spreads

Spreads vary for different accounts. On FXTM, they start from 0.1.

3.   Trading time

No restrictions apply. As long as the market is open (e.g., 24 hours five days a week with FXTM), you can trade CFDs.

4.   Trading volumes

Lot sizes are also determined by you.

Choose a Trustworthy Broker

Some websites advertising CFD services are fake, so be cautious. Like any form of investment, Forex has given rise to different kinds of scams. Make sure the provider is subject to regulation by reputable control bodies. For instance, FXTM is monitored by FCA in the UK, FSC in Mauritius, SEC in Cyprus and FSCA in South Africa.