For many, stock trading has been evolving more and more into a steady income source. Investors can trade stocks through websites at any time, anywhere. Much is owed to the internet since investors can trade stocks not listed on local exchanges. Stock trading is an agreement to buy or sell a future stock at a price agreed upon today.
Trading CFDs allows you to trade an underlying stock on margin, which means you can speculate on the rise and fall of its share price without the need for ownership because you are only speculating on the price movement. This allows you to trade even when the markets are bearish (falling).
This article explains how CFDs can help you trade successfully. Whether a novice or an advanced speculator, this article is relevant for everyone who wants to build a successful trading career on platforms like MetaTrader 4.
What Is CFD?
CFDs stands for Contract for Difference. A CFD derives its value from an underlying asset, or in this case, a stock. CFDs are a type of derivative (an investment that derives its value from another investment).
They’re traded on margin (or borrowed money) and can be used to speculate on the direction of price movements without having to buy or sell the underlying asset itself. For example, if you buy Apple shares on the stock market and they rise in price, the investment will also increase in value because you now own more shares than when you started with your initial stake.
Opening an account allows you to trade utilising just about any stock or index that meets the criteria for inclusion, whether it’s blue-chip stocks like Apple Computer Inc., General Electric Company, or Lockheed Martin Corporation, and high-yield bonds such as Bank of America Corp.
What Are The Types Of CFD?
#1 Penny Stocks
There are many types of stocks that you can trade through CFDs. The most common are penny stocks, mid-cap stocks, and blue-chip stocks. Penny stocks are small-cap stocks that exchange for less than $5 per stake. They are usually volatile and dangerous but can offer significant returns if you pick the right stock.
#2 Mid-Cap Stocks
Mid-cap stocks are medium-sized companies with a market capitalisation of $2 billion to $10 billion. They tend to be less volatile than penny stocks but offer growth potential.
#3 Blue Chip Stocks
Blue chip stocks are large, well-established companies with more than $10 billion in market capitalisation. They typically have a long history of profitability and stability and pay regular dividends.
How Does Trading CFDs Help In Trading An Underlying Stock On Margin?
Trading CFDs on sites like MetaTrader 4 allows you to trade an underlying stock on margin. In other words, buying a CFD is buying shares of that company’s stock. The difference between stocks and futures is that any particular exchange or organisation does not guarantee stocks.
In contrast, futures contracts are traded on exchanges like the Chicago Mercantile Exchange (CME) and Comex.
In general, but not always, there is an initial cost to make a stock trade. However, trading stocks CFDs means you can trade long or short, and this can mean that the only cost involved is a spread which is the difference between the buy and sell prices of your chosen share CFD. This can be significantly lower than buying stocks outright.
It’s a good idea to do your research before deciding which type of CFD is best for you. Study the broker you want to use and look into their trading platform.
Ensure they have been around long enough to offer good support and be regulated by a respected regulatory body such as the FCA, ASIC in Australia, or European Securities Markets Authority (ESMA).
You should also check out their websites for additional features, such as margin lending facilities, leverage (which allows traders to control more risk per unit), or advanced trading tools like charting software. These can all be useful when deciding whether or not investing in CFDs is right for you!