Stock Trading – Why Trade Stock CFDs?

What Are CFDs？ 

CFDs, short for Contracts for Difference, are alternative trading instruments that provide traders with access to multiple asset classes, including stocks, forex, commodities, and cryptocurrencies.  

Contracts for Difference are OTC (over-the-counter) derivative contracts proposed between a trader and a broker or CFD provider. Through CFDs, traders can generate revenue from movements in asset prices without owning the underlying assets. Trading through a CFD does not consider the assets underlying value, but just the price change between the entry and exit points of the trade. 

What Are Stock CFDs？ 

Stock CFDs are contracts for difference (CFDs) that are traded on the share price of publicly listed companies. 

The price of stock CFDs is based on the value of a specific company‘s shares. Traders who open a position with stock CFDs agree to trade the difference between the opening and closing price of the company’s shares. 

Consequently, for the wannabe stock traders, it‘s possible to trade stock CFDs without ever having to own the underlying asset at all. Trading stock CFDs can be performed by a trader using a broker’s platform from the comfort of their home and with flexible leverage that can increase profits or losses. 

How to trade Stock CFDs？  

Stock CFDs positions are opened by selecting the number of contracts you want to buy or sell (the position size). The more the market moves in your favor, the more profit youll make.  

Buy Order

When a trader believes the price of a stock will rise, they open a long (Buy) position and profit if the stock price rises.  

Sell Order

Similarly, a trader would open a short position (Sell) if they believe the price of a stock will fall, and profit if the prediction is accurate.

Trading Stock CFDs VS Share Market Trading 

When it comes to share market trading, a trader actually acquires shares in companies listed on different stock exchanges. For example, Apple shares are available on the NASDAQ stock exchange, so you will own a share of the company. 

Contrary to share market trading, trading stock CFDs involves speculating on a market‘s price without owning the underlying asset, whereas share market trading requires ownership of the underlying shares. As a result, it offers a greater degree of flexibility because stock CFDs offer traders the possibility of profiting both from the asset’s upward or downward movements.  

Check out the table below to gain a deeper understanding: 

Benefits of Trading Stock CFDs 

In recent years, CFDs have become increasingly popular due to their wide range of markets, leverage, and flexibility. To help you make your decision, Ive compiled five reasons why you should trade stock CFDs. 

1. High Leverage 

The biggest selling point of stock CFDs is that they can be traded on margin, otherwise known as leveraged trading.  

As compared to traditional trading, stock CFDs offer a greater level of leverage and the level of leverage varies from broker to broker. There will be a greater potential return when a trader uses less capital with a low margin requirement. There is however always a possibility that leverage magnifies losses. 

For instance, consider you are investing $2, 000 to buy a share. Trading stock CFDs, however, requires less capital if the margin requirement is 5%, so there is greater potential for profit growth. You would only need to invest $100 for a $2000 position. The rest of the funds can be used for other purposes. It should be noted, however, that there are always risks involved. 

2. Helps you profit from falling markets 

Trading stock CFDs has several advantages, including going long or short. In order to open a short CFD position, you sell the number of contracts you wish to trade rather than purchase them. After youve closed your trade, you purchase the same number of stock CFDs. Trading this way allows you to profit when markets fall in price, which gives you a whole new perspective. 

Let‘s say that you’ve studied a stock and believe it‘s going to be tough. If the company’s share price falls, you can earn a profit instead of searching for a new opportunity. If, however, the stock rises, you‘ll lose money. The advantage of shorting stock CFDs is that you don’t have to borrow anything. The process is the same as going long but in reverse. 

3. Access to trade different asset classes 

A traditional stock trading account allows clients to trade only stocks as well as ETFs. Despite this, most CFD trading platforms offer their clients the opportunity to trade multiple asset classes with a single trading account. 

Take the AximTrade trading platform for example. It is easy for traders of all levels to trade multiple forex currencies along with 70+ stock CFDs, indices, futures, commodities, and even cryptocurrencies on a single platform. This has the advantage of letting you start out trading one asset class and slowly add new assets as you go along. 

Furthermore, traders can open up to 15 trading accounts with AximTrade, including 7 Standard Accounts, 2 Cent Accounts, 5 ECN Accounts, and 1 Infinite Leverage Account. 

4. Provides the ability to hedge 

Hedging is one of the most important risk management strategies used by experienced traders. Losses can be reduced by using a hedge as a risk management technique. In uncertain times, you hedge your profits to protect your profits. A hedge position would provide you with a positive outcome if one of your investments went south. 

Due to the fact that you can speculate on a price decline, CFD hedging offers the possibility of protecting your existing portfolio. Consider the case of a blue-chip stock portfolio that you own. If you hold them for a long time, you worry that the market is about to undergo a short dip, which will negatively affect the value of your portfolio. 

Leveraged trading allows you to hedge against this downtrend by shorting the market. As a result, if the market slides, your loss on your portfolio can be offset by your gain on your short hedge. In the event that the market rises, you will lose on your hedge but gain on your portfolio. 

5. Low costs 

As with traditional brokers, stock CFDs brokers offer stop orders, limits, and other types of orders as well. When compared with more traditional trading methods, CFD brokerage fees are generally less expensive. It may be necessary to pay a fee for guaranteed stops with some of them. Spreads are generally how brokers make money, but they sometimes charge commissions or fees as well. A broker will charge a small fee to cover the difference if you spend $50 on a $1000 position. 

When traders buy an asset, they pay the ask price, and when they sell it, they pay the bid price. There is a difference between the two based on the spread, which can either be small or large depending on the volatility of the asset. When opening a trading account, make sure to check the brokers fee details and make sure to get a fixed spread if one is available. 

Tips for beginners trading stock CFDs 

Trading stock CFDs has now very simple and straightforward because of the availability of several brokers. However, before you open a trading account, some things should be considered. 

1. Make sure you stick to what you know 

There may be a wide variety of CFD markets to choose from, but that doesnt mean you must trade obscure assets right away. In the beginning, it is usually best to select only a handful of markets you already know well, and focus on those that you have little experience with. Eventually, you may be able to diversify a little more once you gain a little more confidence in your ability to trade. 

2. Start with a small capital 

Trading with the correct position sizing can be very beneficial. Your capital should only be risked in small amounts on each trade – maybe 1% or 2%. 

You can learn from your mistakes without losing too much money if your total outlays are small. It‘s okay to get 50 trades wrong before losing your balance if you’re only risking 2% on each trade. Cent account would be the best option for you to do so! 

3. Always trade with a stop-loss 

Stops (stop-loss orders) help you manage your risk by automatically closing positions if they reach a certain loss level. Then you dont have to watch every open position constantly, which takes away some of the emotion from trading. No matter how experienced the trader is, they will never open a position without a stop. Despite this, standard stops do not cap your risk exactly because they are prone to slippage. A guaranteed stop will help you achieve that. 

How to Start Trading Stock CFDs Online in Simple Steps 

Getting started with stock CFDs trading is now easier and simpler with AximTrade. With AximTrade, you can trade stocks CFDs online in just 5 simple steps. 

• Open a Trading Account – To open a stock trading account, log in to your member account from AximTrade login, and click on the “+ Open Extra Account” button on the top right.    

• Choose your Trading Asset – AximTrade allows you to select your trading asset along with the forex market you wish to trade. Forex, Stocks, Crypto, Energy, Commodities, Crypto, and Indices are all available through AximTrade.   

• Choose your preferred account type – You can choose between Standard, Cent, ECN, or an Infinite leverage account. You can also choose a Demo account if youre a beginner.  

• Name the Account – Give your account a name and create trading and investor passwords. It is not recommended that the investor password and the account password be the same. Dont forget to use lowercase and uppercase letters, as well as numbers. Click “Done”.   

• Start Trading Stock CFDs – Your stock CFDs trading account is now ready to trade. All your accounts can be found under the “My Accounts” tab. 

With AximTrade, the best CFD broker tailored to your needs, youll have the best trading experience with a fast order execution rate (0.004s), instant deposits and withdrawals supported by a variety of payment options, tight spreads, a minimum deposit of $1, commission-free accounts, and excellent customer service. 

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.