Home 9 Forex Trading For Beginners 9 The notion of CFD and its role in trading

The notion of CFD and its role in trading

To begin with, a stock CFD is a contract for the difference where the underlying asset is securities. In practice, trading such instruments is practically the same as working with these shares with a few exceptions: the trader enters into a contract only with respect to the price, it is not transferred to the ownership of the asset; as a consequence, when buying CFDs are not provided dividends; the process of transactions takes place only between the dealing center (broker) and the trader.
As a result, traders get the opportunity to work with stocks on more simplified and affordable terms:

  • You can trade with a small deposit and huge leverage;
  • There are no restrictions on short positions;
  • Instant opening and closing of transactions.

As a rule, you do not need to install a trading terminal — all trading takes place from a browser or mobile application; you do not need to have the status of a qualified investor (for Russian traders).

Advantages of CFD

More clearly, the essence of the tool can be understood by example. For example, you open a deal to buy shares of Nvidia, but it is carried out in the form of a contract for the difference in price, rather than buying a real asset. The broker from whom the CFD is bought acts as an opponent together with other traders who bet on the contrary-on lowering prices.
Only this does not mean that the broker loses on such instruments, several factors play in its favor:

  • 65% of traders lose money when as soon as 35% earn, therefore, the broker at the same time gets everything else;
  • Higher spreads and commissions bring additional profit to the broker;

Also, the company can automatically open opposite positions on the real exchange, thereby hedging the positions of its customers.
As a result, the brokerage company receives a substantial profit when providing the opportunity to work with CFD contracts. This is beneficial to both the broker and traders.

The secrets of efficient trading

Several important features of CFD trading on stocks:

  • The market does not work around the clock, and during the corresponding session, for example, Russian shares can be traded from 10:00 to 18:50 Moscow time, American-from 16: 30 to 23: 00 Moscow time;
  • When buying CFDs, brokers also assign commissions, in each case they are individual and you need to specify them on the company’s website;
  • Once again, when you buy a CFD, you will not be charged dividends, and the shares will not be listed in your property, i.e., there will be no rights to participate in the meeting of shareholders.

In other respects, working with contracts for difference is no different from Forex currency trading.

Conclusion

CFD-contracts for shares are a convenient tool that allows a trader to profit from changes in the price of shares of large American or Russian companies. An important feature and advantage of such contracts are that the trader does not receive shares in the property; therefore, he does not need to meet the requirements of a qualified investor and have a large Deposit. The key drawback of CFDs is the absence of dividends and relatively high spreads. However, this becomes irrelevant against the background of the opportunity to become a participant in the stock market and profit from the growth of world-famous organizations.