CFD trading has recently become a way to make a bit of extra money from the comfort of your own home, with some reduced risk when compared to standard trading on the stock market. CFD stands for “Contract for Difference” and it is based on the agreement between the two parties involved to settle at the end of a disclosed period, with the difference being the price at the start and the end of the contract, which is the traders profit.
The difference in the price at the start at the end is multiplied by the amount of shares that was agreed upon during the start of the trade and this is then the profit made by the trader. The process is very similar to ordinary share trading, in that they are purchased the same way and in the same amounts, even with the same prices, however, there are a few very clear and very distinct differences with ordinary share trading that are to be explored in the remainder of the article, with some tips and tricks in how to get the most out of a CFD trade and the protocol to think about when entering into one.
The first and foremost thing to consider, is that a CFD trade is operated in terms of margins. This means that the trader can maximise their capital and can often mean less capital is needed to get a good return than could be the case for ordinary share trading. Another point to make is that there is no stamp duty that needs to be paid for a CFD trade and this means a saving of 0.5% over a traditional share trade purchase. The flexibility in terms of short or long term trading can mean a profit can be made from both rising or falling stock and a greater range of financial markets is available to the trader when opening just one account of their own.
The magnified profits made also work the other way round for a CFD trade, so the losses made will also be magnified and you could find yourself losing large amounts of money quickly, as a result. It is therefore important to track each trade and put in place a stop loss in order to cut your losses. The main aspect is you do not have any rights as an investor and in fact, the commission charged on a trade means that they are more suited for short term investments because the longer the trade goes on, the more the costs increase.
There are many things to consider before entering into a trade and these include analysing risk, the trading system and the psychology of the trader. A useful graphic is provided to show the most important factors in becoming successful in CFD trading:
It can be seen that it is the trading psychology that is most important and it is good to get yourself into the right frame of mind before making a trade. It is always important to apply logic to every situation, operate like a robot, rather than a human and have a rigid structure that you will stick to when trading.
In addition, it is important to closely track your losses and profits. Cashing out too early on a profiting trade can be a big mistake, but perhaps the largest mistake is clinging on to a falling trade, in the hope it will start to rise again, it is always best to cut your losses whilst you still can, without draining your account so you can live to trade another day. A definite thing to do is to never dd to losing trades, this may sound simple, but, it is worth mentioning as some people have done this in the past, using a trend line to monitor the trade is a much better way to avoid making this mistake.
There are currently many platforms that are available in which CFD trading can be used to make some money online from the comfort of your own home. These sites include CMC markets, amongst some others that give the trader an easy way to start trading straight away, with welcome offers even being available from time to time.