How to trade СFD — try your hands on stocks, metals and commodities

Hello, dear colleagues, forex traders!

The Forex currency market is quite naturally associated with currency pairs trading. Nevertheless, the decentralization of the market gives freedom in terms of the choice of trading assets and, accordingly, the opportunities for earning. This is a significant advantage that allows you to earn on the difference in instrument prices on the largest exchange sites, while greatly reducing the minimum threshold for entering the “big game.” More details - in our today’s material.

What is CFD?

Three hundred years ago, the auction procedure for determining the price of agricultural products was established, by concluding deals with the equality of demand and supply held on a special platform - the stock exchange. Now, this rule is extended to all goods and raw materials, securities of enterprises - shares and liabilities (bonds).

Forex is a stand-alone market, which, being decentralized in its essence, excludes manipulation of the states’ national currencies. Currencies are traded on the international interbank market without being tied to the site and are not subject to regulation when the rate is determined by global demand and supply.

Speculators of the XX century introduced a new class of instruments - derivatives from exchange-traded assets. Futures and stock options, financial instruments, and goods allowed to reduce the costs for commission payments to exchanges, to avoid taxes and take advantage of the leverage.

The leverage, allows you to trade an asset package (100 shares or 1000 bonds, etc.) for 10% of the value. In this case, the profit or loss is calculated at a rate of 100%.

CFD (Contract For Difference) is a derivative contract, the percentage of the value is taken from a block of shares (or any other asset, called a “base”) equal to 1 lot. Unlike futures, the lot can break up like a currency one to a minimum value of 0.01 lot.

Such pricing is an explanation of the origin of the contract. Securities of American or European companies are traded at a cost ranging from tens to hundreds of US dollars. The prices of futures and options reach the value of a used car. The small investor has only one way out - buying one share at a price of 5% of its value.

CFD contracts are an over-the-counter offer between a broker and a trader, in which the price of buying or selling an asset (from the broker’s list) is taken as zero. A trader who enters into a contract, brings a deposit (2 or 5% of the asset market value), realizing that when closing a position, he will either make a profit with a positive trade result or a loss will be written off the account.

CFD Tool Types

OTC assets, which include CFDs, are issued for any type of underlying asset if the pricing and settlement conditions are clear to both parties (the seller and the buyer).

As a rule, on demand are the CFDs of well-known brands. Quotations and codes of instruments (tickers) coincide in trading terminals of Forex brokers and exchanges, on which these papers are placed during the IPO.

Each exchange has its own index, which includes the securities of the “flagships” of the country’s economy (“blue chips”), calculated by the platform’s method. The purchase or sale of the index is possible through CFD contracts. The value of the index is relative, measured in the process of constant conversion of stock prices. Therefore, the underlying asset that determines the cost and calculation of the difference for CFDs is the futures index.

Energy futures, as well as bonds and currency, can be purchased as a CFD contract. The width of the offer of the type of basic instruments that determine contracts for the difference is limited by the offers of world exchanges and the broker’s fantasy.

Dividends per share

If earlier in the stock market the shares were purchased in the expectation of future growth, the payment of dividends was not taken into account. Successes and business achievements of individual companies allowed to provide payments to shareholders in the form of dividends that exceed the yield of bank deposits, which caused a speculative growth of blue chips bought in the “hunt for dividends”.

At the end of each quarter (the frequency is determined at the shareholders meeting), summing up the financial performance, the joint-stock company makes a decision to pay dividends.

The percentage of net profit, determined for payment, is divided by the number of shares, after which a decision on the terms of payment is made.

Prior to the meeting of shareholders, a “cut-off” is made, the terms of which are known in advance. A special registrar company takes into account the owners of securities at the time of cut-off, in order to send a dividend to their account in the event of a positive decision.

Any acquirer of the share before the cutoff can count on the amount of quarterly (annual) dividend payments.

CFDs, like any derivative contracts for shares (futures and options), are not legally eligible for payment. The broker himself decides how to proceed in this case, so carefully read on the website and the texts of the Agreement about the terms of payment and accrual of dividends.

The general practice of such payments from the Forex dealer is as follows: if at the moment of cut-off, the client was selling CFD for shares, a sum of dividends will be deducted from the account and accrued if the CFD for the shares is bought.

The amount is multiplied by the number of shares in the CFD specification. 1 full lot is 100 shares. The dividend is calculated per share.

After the cut-off, shareholders’ voting and financial payments will be held after some time. In the trading terminal, on the broker’s website and in the media, the dates of cut-offs, meetings, dividend amounts, known results in advance are published as they are.

The size of dividends - the expectation and reality have a strong impact on the value of securities, causing growth or decline (the “dividend gap“). Investors and speculators closely monitor information, corporate news in search of short-term guaranteed earnings.

Shares, as a rule, grow before the cut-off and fall on the fact of dividend payment. Rumors of high payments cause trends, but a beginning investor should take into account the “external background” - the overall economic recovery, which can ignore the negative news.

Advantages and disadvantages of CFD

• Perfect for small investors.

The price of entry on world stock exchanges starts at $5000. The minimum purchase is 10 stocks, maximal leverage is 1 to 3, average stock currency change is 30% per year. Forex broker gives the investor access to the stock market with a deposit starting at just $100 and a leverage reaching 1 to 500.

• Low transaction costs.

The stock exchange broker in the course of shares trading takes money for keeping the account, for the depositary (keeping and registering the shares assigned to the trader), the percentage for maintaining the trader’s account, the commission for each transaction. If the trader decides to sell the shares, the broker will bill for using the loan.

• One account and terminal.

The shares are traded at various platforms. The stock exchange broker divides accounts by stock exchanges and instruments. The complexity of access to the site due to the requirements of the Regulators does not allow the client to provide any stock exchange he wants. As a consequence, a trader has to divide funds by transferring them to different accounts for the purchase of currency, shares or options, or open accounts with different brokers.

Trading platforms for different brokers can vary, there is no single coverage in the stock markets, like in Metatrader.

Disadvantages of CFD

• There are both the risks of problems with licensing documents (licenses) of the Forex broker, and the likelihood of a “scam”;
• An investor who incorrectly takes into account the “leverage effect” is at risk of losing the entire amount of the deposit;
• CFD does not give ownership, so the mechanism and the fact of dividend payment depends on the decision of the broker;

Secret CFD trading opportunities that everybody knows about, but nobody pays attention on.

If you are tired of losing money on currency pairs, it is worth trying to use the stock market of shares with a predictable dividend yield. Open the S&P chart and evaluate the trend, mostly going one way:

The growth of shares is predetermined by the mechanism of the market. Adopting the direction of the trend for the constant, the investor is left to choose the portfolio of stocks and diversify the investments (“lay eggs in different baskets”).

All Forex brokers provide access to CFD contracts. Therefore, the choice of the company boils down to studying the ratings on forums and sites, licenses and reviews, which will ensure the protection of the portfolio.

Attention should be paid to Roboforex Stocks, the broker is included in the top 10 of any Forex ratings. The difference is that this subdivision of Roboforex specifically deals with shares. If a trader decides to become an investor and receive income from the market, learn how to select securities and work properly in the stock market with the help of CFD, it is convenient to do this in this firm.

What strategies to apply for CFD investment portfolio?

Working with CFDs for stocks is basically “from purchases”. Growing trends are determined using moving averages with a period setting of 50, 100 or 200.

Oscillators (mainly MACD) are used in the role of a filter to avoid making transactions on overbought levels, adding a position when the market is oversold.

The reliability of CFD purchase is determined by the tactics of Alexander Elder - “Three Screens”. Trade is widely used from the levels of Murray or DeMark.

Conclusion

If you have not traded CFD before, at least, do not ignore such an opportunity. Exchange contracts provide much more variety than currency pairs while possessing unique patterns. Perhaps, just the same from the tools CFD you can collect your ideal trading portfolio.

Regards, Michael

ForexTraderPortal.com