CFDs are a type of derivative that allows you to profit from the rise and fall in prices of various types of stocks without actually having to own them. They can be an excellent way for traders with limited capital to make large profits with relatively little money at their disposal. Still, it also means that CFD trading carries additional risks and considerations which should not be overlooked.
You will need to consider your experience level before deciding on an appropriate investment strategy. If you are new to CFDs, then if possible, only invest in products that you know well or products where there is plenty of liquidity available such as popular commodities like gold and oil.
Stock CFDs are a financial instrument that offers you the possible opportunity to take advantage of both rising and falling share prices without buying actual shares.
Look for good liquidity in the market
Ensure there is plenty of liquidity in the market you want to trade and ensure there are no significant spreads that will eat into your profits. Beware of CFDs on low traded shares, or ones where a large percentage of the company’s stock is owned by one party as these can be very illiquid, and it may take time for you to find someone willing to take the other side of your trade.
Stocks with high volatility often lead to higher returns
When opening a position, look for stocks that have recently experienced explosive gains or losses, as this indicates that they are likely to continue moving quickly. However, beware that if their price movement begins to stall after several days, this may indicate that the trend is about to end, and you should close your position as soon as possible.
Look for companies that will continue to grow over time
When trading stock CFDs, it can be a good idea to seek out growing companies that offer promising futures. However, steer clear of stocks where there is evidence of a financial crisis or the looming prospect of losing a key contract or product line. These sort of ‘value traps’ can quickly spiral into freefall, leaving those who chose them as their investment very little time before they become virtually worthless.
Keep an eye on news events that may affect share prices
Ensure that you are aware of any significant events which have recently occurred around the businesses you are considering trading with. It’s imperative to keep abreast of any important company news, such as product releases, contract wins or losses and information that may indicate the likelihood or otherwise of success for future projects they are engaged in. This information can have a colossal impact on share price, so don’t underestimate it.
Diversify your portfolio with CFDs
Take advantage of CFDs by choosing several different companies instead of putting all your eggs into one basket. If you spread your investment among several stocks, you will be able to minimise risk if things go wrong with anyone position because even if it does spiral down, you won’t lose everything.
Think about the benefits offered by CFDs
If you already hold shares and wish to benefit from their potential price rises without selling them, consider opening a CFD position with your broker and sell the corresponding number of contracts. It will allow you to offset your potential losses.
Use stop-limit orders to protect yourself against dramatic drops in share prices
When using this kind of order, it is possible to place an upper bound on the price at which it will be executed to follow along with the stock but never gets any higher than a set point. Use this feature when trading stocks that have suffered sharp drops recently, as it will help prevent you from getting caught in a catastrophic collapse and losing everything overnight.
Always treat CFDs as if they were actual shares until proven otherwise
When trading stock CFDs, it is crucial to consider yourself as if you owned the shares. Once this feeling has taken hold, you will be able to manage your trades with much more care and precision than if you considered them as trivial financial instruments that didn’t matter to you overmuch.