What is CFD?
CFD is an acronym for contract-for-difference. It is a prevalent form of derivative trading. In a nutshell, CFD offers traders an opportunity to profit by merely speculating on price movement without owning the underlying asset.
If the market moves in the direction you predicted, you will profit from the price difference. But if the market goes against you, you will make a loss and the difference will be deducted from your trading account balance.
10 years ago, when CFD first started, the only way to trade shares was physical trading floors, where people were bargaining prices. Thanks to the development of the internet, Internet-based stock exchanges, like NASDAQ, have developed.
Juno Market has partnered with NASDAQ to allow their traders the opportunity to trade CFDs effortlessly.
Difference between CFD trading and share trading
CFD trading is similar to share trading, but in CFD trading, you speculate on a market’s price without taking ownership of the underlying asset. In contrast, when you trade shares, you need to take ownership of the underlying stocks.
In CFD trading, you are buying a contract between yourself and the party providing the CFD. This can be traded short or long and you are not required to deliver the underlying asset in the event of a short sale.
Contracts for differences are traded on margin, which means there is no need to tie up the full market value of purchasing the equivalent stock position. This will amplify any profits you’ll get, but also means your losses can exceed your deposits, manage your risk accordingly. CFD also gives traders the possibility to open larger positions than their capital would otherwise allow. On the other hand, when you trade shares, you’ll need to pay the full cost of your position upfront; therefore, you can’t lose more than you invest.
CFDs also allow you to use more advanced strategies and tactics, such as hedging your existing share portfolio. Even though CFDs themselves can be used in global markets, CFD traders can only operate in certain countries such as most of Europe, Singapore, Australia, South Africa, Canada, New Zealand, Hong Kong, and Thailand.
CFD History and Revolution
CFDs were originally developed in the early 1990s and it is accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg. They are considered the fathers of CFD. CFDs first emerged in the over-the-counter and were originally traded among financial institutions, such as banks, to cost-effectively hedge their equity exposure by employing certain risk-reducing and market neutral trading strategies.
In the early 2000s, the rise of online trading and CFDs became popular with the private clients and the retail market retail traders through brokers such as Gerrard & National Intercommodity, which was later taken over by MF Global, IG Markets, and CMC Markets.
Further adding to CFDs popularity was the introduction of CFDs to the Australian market in 2002. It is the first international CFD destination after the UK. The CFD market in Australia expands quickly, with some estimating nearly 40,000 active CFD traders in Australia alone.
In 2007, Australia Securities Exchange was the first country to offer CFDs on an exchange. It was listed on the top 50 Australian stocks. In recent years, retail traders woke up to its benefits when they realized that the CFDs could be used to leverage any underlying financial entity without exception. Today CFDs are very popular in countries where they are available and are offered in a very diverse range of financial assets.
A CFD allows you to access global markets sitting in one place; hence it is slowly becoming more popular in the wealth strategy by providing an additional investment type for those who wish to diversify their portfolios.
CFD trading permits you to trade any market that’s open from your broker’s platform, including individual shares, treasury bonds, stock indices, and commodities. However, some of these assets might change with less intensity than currencies, but at the same time allowing for a significant income.
With Juno Markets you’ll have the opportunity to trade with 20 of the world’s most recognizable companies such as Apple, Amazon, Facebook, Google, Microsoft, and many more. Trading shares CFDs has a couple of unique benefits.
You can collect dividends on the underlying shares on a long trade, potentially creating an extra stream of income. Similar to other CFD instruments, shares CFDs also benefit from leverage, meaning you’ll be able to gain access to more shares than you normally would through traditional investing. And finally, in a short trade, you’ll have the opportunity to profit from a downturn.
CFD Terms: Going Long vs. Going short
Going Long: When you open a trade with the anticipation of rising prices, hoping the underlying asset price will increase. This means you can then sell at a later date for a higher amount.
Going Short: When you open trade with the anticipation of a price decrease in the underlying asset. You might choose to do this if you think the value of the stock will go down.
Cost of trading CFD
Spread: When trading CFDs, you must pay the spread, which is the difference between the bid and ask prices for a security. When buying, you might pay a slightly higher asking price, and when selling, you might accept a slightly lower bid price. Spread is similar to a transaction cost to the trader.
Overnight Financing: At the end of each trading day (at 5 pm New York time), any positions open in your account may be subject to a charge called “Holding cost.” They are positive or negative charges depending on the direction of the spread. Juno Markets holding cost is based on the overnight Fed Rate. Please refer to your MT4 platform for the most up-to-date rates.
Market data cost: These are charges for exposure to CFD trading services. Every broker has their own subscription fee.
Commission charges: You might have to pay a commission charge when trading CFD. It is typically based on the overall value of your trade, depending on the broker. Fortunately for you, Juno Markets new shares CFDs are zero commission!
8 Tips on Trading Shares CFDs
1. Knowledge is Power
Before you start trading, it is crucial that you understand what CFDs are and how they work. This includes knowing CFD trading basics as well as your particular instruments. There are tons of individual markets to choose from, including shares, treasury bonds, stock indices, and commodities. Try to choose a market you have a good understanding of.
We know it can be hard to resist jumping straight into the real market and start trading. However, we recommend that you start your trading career with a demo account. Most brokers offer these practice accounts to allow novice traders to test their trading strategy, be familiar with the CFD trading markets, and get used to the broker’s trading platform. Most importantly, it’s a great way to test your trading tips free of charge before risking actual money.
3. Limit Your Leverage
Always start small. There is always going to be a temptation to increase your position size when you are winning. It’s not a good idea to leverage more than 3 times your account size, particularly as a beginner. Adjust your leverage based on the level of your risk tolerance profile. As Paul Tudor Jones famously said, ‘Don’t focus on making money, focus on protecting what you have.’
4. Trading Strategy
Find a strategy that will compliment your trading style and make sure it fits in with your risk tolerance and financial situation. Without an effective strategy, you might not see many benefits. Two popular CFD trading strategies:
This involves identifying a key price level; you expect the price to break through and then buying or selling at that price, depending on the trend, to take advantage. Remember, with breakout trading, avoid any trades when the market isn’t providing clear signals.
A Contrarian trader sees what everyone else in the market is doing and promptly does the opposite. Timing is everything in this strategy. For example, if a share price has been on the decline, identify a point where you believe it’s near the end of the trend. Then enter a buy position in anticipation of the trend turning in the other direction.
5. Set Yourself Stop Losses
Used stop losses correctly and you’ll be able to minimize your losses and help protect your capital. As William O’Neil rightly pointed out, “Letting losses run is the most serious mistake made by most investors.” Discipline is one of the keys to successful trading. Set a CFD stop losses outside of market hours and stick to it religiously. This will also help you forecast your maximum possible loss.
6. Don’t Put All Your Eggs in One Basket.
A straightforward way to lower your risk is ”diversification.” Today CFDs are available and are offered in a very diverse range of financial assets, so there’s ample opportunity to diversify. For example, if all your investments were in the property sector and there was a sharp decrease in housing prices, all your positions would suffer losses. But, if you had property, oil, and pharmaceutical stocks, you would be less exposed to losses.
7. Cut Your Losses and Let Your Profits Run
You will find that it is easy to open positions, and closing them is the hardest part. Some say to win in the trading game; you must learn to pull the trigger on losing trades. Never drop a stop loss to let it breathe more and never add more money to a losing trade in hopes of a quicker way to recover your losses. The key to profitable trading is keeping those unavoidable losses small and giving your profits room to run. To achieve this, you must learn to take the emotion out of your trading.
8. Monitor Your Position
Even though you may have stops and limits in place, it is essential to review your positions on a regular basis frequently. This will help identify any issues or opportunities quickly and react and take action when necessary. It is also essential to make sure that you have sufficient margin maintained in order to keep your position open.
Pros of trading Shares CFDs
- Traders can benefit from both the rising and falling of an asset price.
- Global market access from one platform – most brokers offer instruments in all words, major markets, easier to diversify your portfolio.
- CFD provides higher leverage than traditional trading. Its high leverage, low margin requirement. A small investment can earn you a greater potential return if you take advantage of the leverage smartly.
- No shorting rules or borrowing stock – CFD can be shorted at any time without any borrowing costs, as the trader doesn’t own the underlying asset.
- It is far cheaper than trading assets and gives you access to blue-chip shares such as Apple, Amazon, and Google.
Juno Markets offers trading on 20 of the largest companies by market capitalization with zero commission charged.
Cons of Trading Shares CFDs
- As we mentioned above, leverage can amplify your profit, but it can also do the same to your losses. These losses can be more extreme when compared to your initial investment.
- Margin and Overnight Charges- Just like borrowing money from the bank, an interest rate will incur.
- Fraud and scam – CFD industry is not highly regulated and most of the time, the broker’s credibility is based on financial position and reputation rather than government standing or liquidity. Important to review a broker background before opening an account.
- Spread – Having to pay the spread on entries and exits reduces the potential to profit from small moves.
Is CFD Trading Right for Me?
CFD trading is perfect for traders who want the opportunity to make a better return for their money. Some figures show that CFD accounts for around one-third of all trading activity around the FTSE 100.
CFD trading may be ideal for people:
- Looking for short-term opportunities
- Ideally to traders that have some experience in trading
- Looking to diversify their portfolio – Gain access to markets that otherwise wouldn’t be available without the appropriate funds.
- Wants to explore going long and short – Since the underlying asset isn’t actually owned, traders have the flexibility to shorten CFD trading instruments without worrying about additional costs.
If CFD is for you, get in touch to find out more.