Such an instrument as CFDs on stocks should not be overlooked even by beginners. With seeming complexity, it is quite simple, and even more – simplified compared to stock trading. However, there are some peculiarities. For the most part, they are profitable, but there are also factors that do not allow CFDs to be equated with underlying securities.
Stock CFDs: Key Features
First of all, you need to understand how a derivative differs from an underlying asset.
- Opening and closing of a trade occurs only in relation to the value. It is noteworthy that the owner of the contract for difference does not transfer the shares themselves for use. Accordingly, in this case, it is not provided for the receipt of income expressed as a percentage. In addition, holders of share CFDs do not have the right to vote at the shareholders’ meeting.
- A transaction is made between two parties: a speculator and a broker.
- Having small finances on the account, you can use solid leverage.
- There are no restrictions on short positions.
- Operations are actively opened and terminated.
- To trade CFDs, it will be enough to have a special terminal or a downloaded version of the program on your mobile phone.
- There is no need to have the status of a qualified investor – this is an advantage for traders from Russia.
Why is trading this type of derivative profitable?
Currently, the CFD stock market provides its participants with good opportunities. With a fairly modest amount of money, a person gets access to several hundred different stocks. Among them are securities of American unicorn companies, which are in a stable bullish trend. Having invested in these assets, a trader will be able to make a small fortune in a few years. Of course, this is subject to correct market forecasting and compliance with the rules of risk and money management.
Interestingly, not only the owner of the derivative, but also the broker receives a certain benefit in the CFD market. How does this happen? Let’s look at an example. Let’s say a trader opens a deal to purchase Nvidia shares, but through a derivative instrument. The broker from whom the contract for difference is purchased is de facto an opponent – as are other traders who have bet the opposite, on a decrease in value. But this does not mean that the dealing center suffers losses.
According to statistics, 85% of market participants lose money, and only 15% earn. As a result, the broker gets the entire financial balance. Another source of income for an intermediary company is increased commissions, as well as spreads. As a last resort, it is possible to automatically open opposite positions on a real exchange, in order to hedge the positions of your clients. As a result, the intermediary makes a very solid profit by allowing private traders to trade CFD shares.
Let’s summarize
Thus, the main advantage of CFDs is the possibility of simplified trading in shares of well-known companies showing positive dynamics. It is important that the requirement to provide confirmation of the status of a qualified investor is leveled. The broker is also interested in working with the named financial instrument because it earns on the spread, commissions and cash balance. It turns out that the described trade is mutually beneficial. In addition, it does not require a large initial investment from the trader. You can earn more profit with the help of leverage.
