Why trade CFDs instead of investing in stocks through a bank? Obviously, your preference should be based on your needs, your goals, your time, and even your budget.
If you want to invest long term, the traditional way is certainly the best option, while if you prefer to invest short term (or very short), perhaps with little capital , CFD trading could be the right choice.
To get started, we recommend the same platform that we used for the examples in this course. Registration is free and you can practice with a demo account without deposit to personally evaluate the platform and learn how to use it by practicing.
Things to consider before trading CFDs
These are the aspects of CFD trading that you should consider:
- This is the short / very short term best practice . You can close positions even after a few minutes. Obviously, positions can be closed even after hours, days, weeks, months depending on your preferences;
- They produce gains or losses in proportion to the performance of the asset with which it operates. You can trade up and down on an asset that is traded on the financial market;
- It is advisable to follow the news that may affect the asset or assets on which it is traded and that could affect its price;
- The cost of the spread applied by the brokers must be considered . It is an alternative cost to the traditional commission, which is applied to the opening of a position. This is deducted and posted to the profit and loss account of the individual transaction. We talked about it in the spread lesson.
- Being leveraged instruments, CFDs allow you to trade with less capital than is required by traditional investment.
Let’s develop these five points in detail.
Short and very short term investment
One of the most fascinating aspects of CFD trading online is that you can make big profits in a short time , depending on the price changes that occur after opening a position.
For example, if we open a buy position on Unicredit shares and they obtain a percentage change of 1% in a few hours, at the same time my capital will increase proportionally.
In addition to Unicredit stocks, I can open positions in thousands of stocks around the world, as well as in currency pairs (eg euro / dollar), stock indices (eg Dow Jones or FTSE Mib), as well as in raw materials (eg gold, oil, natural gas, etc.).
The speed with which a result is obtained is therefore one of the main attractions of CFD trading.
However, this speed also requires more effort , as you need to be more attentive to open positions and ongoing trades.
If we open a long / short position (i.e. up or down) on a particularly volatile particular stock, we will have to keep an eye on our trade to close it as soon as there is a reversal that we expect.
A very useful function of trading platforms for this purpose is the Stop function. The stop function can be of several types but the main ones are these two:
- Stop Loss : a feature that allows you to set an automatic close when a certain loss is reached
- Stop Limit : a function that allows you to set an automatic close when a certain profit is reached
We will talk about the other types of stops later in the course.
Profits and losses in proportion to the evolution of prices
In CFD trading, you can trade up and down : this means that you can decide to invest in the price of an asset or its downside. For example, you can win by predicting the rise in Amazon’s share price or the fall of bitcoin.
With CFDs, you can trade up and down on any asset. You have complete freedom of choice based on your market forecasts.
The results of your operations can be positive or negative . In fact, you can get:
- Benefits : when the forecast is correct, that is, the asset price goes in the expected direction;
- Losses : when the forecast turns out to be wrong, that is, when the price of the asset goes in the opposite direction to that forecast.
In this account, however, we must also add costs such as spread (the most important cost applied by CFD brokers) and overnight costs (although not very incisive, if not long term).
Of the propagation, as well as in the specific lesson, we will talk shortly.
Financial news but not only
In CFD trading, precisely because of the speed with which you can (and should!) Take advantage of the tempting opportunities that present themselves by the hour, you must carefully follow the financial world.
We all agree that following all the financial news in the world is not possible and it is also counterproductive.
For this reason, we give you some great advice: consider a few assets at a time , depending on the period, perhaps keeping some of them among the true ‘favorites’. By assets we can refer to stocks, stock indices, commodities, cryptocurrencies, Forex currency pairs, etc.
For example, the EUR / USD is a great asset to trade and offers great information based on the tons of news coming in every day. Another asset could be gold or oil.
In some periods, trading on the European, American and Asian stock indices is easier than you think.
Taking advantage of financial news is a practice that can be done on a daily basis . To get started, you only need three things:
- A free trading platform , provided by an authorized broker like eToro
- A portfolio of sites for up-to-date information (eg Yahoo Finance, Sole24ore, Bloomberg di Repubblica, etc.)
The spread is the difference between the buy and sell price of a CFD , that is, between the price that appears below the purchase item and the one that appears below the sale item.
Let’s briefly recall that when you click buy, you open an ascending position, while when you click sell, you open a bearish position.
Well, in the difference between the bid and ask price, the broker gets his compensation for his services. When you open a position, the spread is deducted from the available capital and posted to the profit and loss account of the individual trade (that’s why the position appears at a loss at the beginning).
The spread, it must be said, is generally lower than traditional commissions. In CFD trading, the lowest margin is the one that applies to Forex trading.
The spread is also important for comparing multiple CFD brokers . In fact, if you are trading a few financial assets, it is wise to find out which (regulated) brokers apply the tightest spreads on those assets.
Leverage is a mechanism that allows CFD traders to invest much less capital than they would have to use in traditional investment.
For example, with a leverage of 1:30, instead of investing € 1,000 (and therefore leaving € 1,000 out of the portfolio), only € 33 would be enough.
We will talk about this in the next lesson.
Go to the next lesson: leverage