Trading shares as CFDs has grown in popularity over the years as more people are downloading apps and accessing the financial markets, however while it may look easy, it’s anything but. In fact, it can be quite dangerous to your capital (the money you use to invest) if you simply download an app and start opening deals. So, let’s take a deeper look at share trading as CFDs to get a better idea of what it is and how it works.
When trading shares as CFDs, or Contracts For Difference, you’re essentially investing in price movements in both directions—increases as well as decreases—without the need to purchase the underlying asset. Essentially, you’re trading on volatility without owning any actual shares. Take, for example, a brand like Tesla. Tesla is constantly making headlines for its expertise in electric car manufacturing as well as the occasional incident that tends to happen (such as recent troubles with its driverless driving feature). As such, Tesla share prices tend to fluctuate based on various elements; we can assume that when Tesla does well, share prices could increase, and when there’s controversy, share prices may decrease.
When it comes to share trading as CFDs, a trader is then able to take advantage of share price movements in both directions. If he sees a bit on the news that suggests to him that Tesla shares may be headed upwards, and he can justify that assumption by glancing at Tesla’s analysis chart on the trading platform and using his trading acumen to decide, he’d open a ‘Buy’ deal or ‘Go long,’ on a certain number of contracts and for a specified period of time. If Tesla shares do, in fact, increase during that time period, the trader makes a profit. If they do not, he takes a loss. The same goes for price decreases; if a certain headline or market analysis convinces a trader that Tesla share prices may be headed for a decrease, he would open a ‘Sell’ deal or ‘Go short.’
Aspects of CFD Trading
Regardless of your level of CFD share trading experience, it’s always a good idea to operate in markets and trade instruments with which you’re familiar. Opening multiple CFD deals might, at times, seem tempting, but traders should also beware of dealing in markets in which they don’t have adequate experience. The best route is to start off by learning about a certain market or financial instrument, reading up on its history and what the market analysts are saying about it, and only afterwards start trading with it. Stay in familiar territory and don’t over-reach yourself.
Another thing you may want to do when starting to open CFD deals is write down your trading goals and the limits of how much you are willing to lose. Afterwards, when you have spent time researching your instruments, you’ll analyze historical performance patterns, use indicators which monitor index performance, and explore the power of charts used in technical analysis. Through this, you’ll develop your own strategy, which you should stick to, and not be drawn off course by surges of enthusiasm or hype.
Getting the Ball Rolling
Practically, starting to trade CFDs begins with finding the right trading platform for you. Search through regulated CFD brokers (to make sure your broker’s activities are monitored by the proper financial authorities) and take the time to sift through them. The trading platform you settle on should be easy-to-use and fully equipped with all the tools and features you’ll need including trading signals, market orders, an economic calendar, and educational materials to keep you in the loop. Nowadays, most brokers offer a demo account that allows you to take the platform for a test drive without risking any actual money.
Once you’ve found the right platform, you’ll choose your instrument, decide whether you want to open a “buy” or “sell” deal on it, and settle on the size of the deal you’d like to open. Actually opening the deal is a matter of clicking on the icons on your platform, which will be set out in an easy-to-follow format. After this, don’t forget to monitor your position as the days pass, and then close the deal (also a straightforward matter) at the time of your choice.
The most valuable piece of advice you’ll need as you start share trading CFDs is patience. Rome wasn’t built in a day, and neither was Wall Street. It takes time to really get a sense of where the markets are headed, and even then the unexpected may occur. Your best bet is to educate yourself as much as possible on the ins and outs of CFD trading and start out slow and steady to build a sense of confidence.