There are multiple ways of earning money online. Some are legitimate, while others are scams. Some allows you to make larger profits at a higher risk; others offer lower profits are a lower risk. CFD is one of the most popular tools for earning money online. It may seem quite complicated at first, but it really isn’t and thousands, even millions of people trade and earn money online using CFDs.
The Basics of CFD Trading
CFD means contract for difference and it represents the difference between what entered and exited a certain trade. With CFD the aim is to predict the movements of the underlying assets, without owning the assets themselves. Some people are keen on describing the CFD as a deal between the person who invests and the broker. It is probably best to explain though an example, so here goes. Let’s say that the assets in question are stocks, stocks of company X. The stock has a price of £10 and 200 shares are bought, which would make the price of the whole purchase £2000. If you were trading at the regular stock market, via a traditional broker, the margin would probably be about 50%, which means that the amount required from you would be about £1000.
If you were going through a CFD broker, the margin might be around 5%, which means that you’ll only need £100. Then on entering the position will be at a loss same to the amount of the spread. Thus, if the spread is 10p, the stock will need to consider 10p, for it to be at an even price. If you were the owner of the stocks you would’ve gained 10p, but you would have to pay a commission, in addition to the higher requirement in terms of initial investment. Then if the asset in question, i.e. the stock reaches a price of £10.10, if it were to be sold, the owner would be able to make a profit of £100, or £100/£1000=10% profit.
At that point, although the price is £10.10, the CFD price will more likely be £10.08. In such an occasion the CFD trader would have few pence less, or a total of £80, which is a staggering 80%. And even if the initial price is higher for a CFD trader, say £10.02, that’ll still be a £60 gain. All in all, you can gain £60- £80 real profit, compared to £100, without the fee that the person trading via a traditional broker would have to pay, plus the fact that the initial capital that is required is much smaller with CFD trading.
Leverage
So, basically with CFD you speculate on the fluctuations of the market prices in the feature, no matter if the markets are sinking or growing. CFD trading offers leverage that you don’t get with traditional stock market trading. The leverage you get with CFD is due to the fact that the margin may be as low as 1% or 1.5%, depending on the market in question and your choice of broker. The margin requirements for CFD can’t be higher than 20%. The higher leverage allows you to have greater gains with a lower capital outlay. On the other hand this means that your losses can also be magnified in an event where you fail to predict the outcome of the trade.
Other Advantages of CFD
In addition to leverage, there are certain other general advantages of the CFD trading. First of all, you have an access to most important markets in the world from just one platform. This means you can practically trade anything and everything. A greater scope usually means greater earning potentials. Of course, you’ll need to take measures of precaution, because traders can get overwhelmed by the wide array of opportunities and end up “getting lost” in the investment options.
With CFDs you don’t have to limit yourself to stock trading. Indices, treasuries, currencies and commodities can all be subjected to CFD trading. In addition, some stock markets have very strict rules concerning shorting, also known as short sell, where the trader has to borrow before shorting, or where the margin requirements are much higher for shorting. You wouldn’t have these problems with CFDs, you can short sell anything and any time, because the principle of CFD trading is not based on the requirement to own the asset. If you had been trading at the traditional stock market, or at least read about it, you’ll know that traditional stock brokers offer orders such as limits, stops and other more specific ones like – One cancels the other, and If done.
Traditional stock market brokers charge traders for these orders or keep some of their earning at the end. This is not the case with CFD brokers, at least not the rule. Some CFD brokers won’t even charge a fee for trading CFD for you. These brokers wouldn’t take any fees or commissions when you are about to exit or enter a CFD trade. Instead, what they do to earn money is have the client pay the spread. The spread may vary and be larger or smaller, but it usually is a pre-set. Other CFD brokers, on the other hand, may charge fees and we discuss this further in this article.
And, last but not least, while there are minimum and maximum amounts of capital to day trade, or limits on the number of day trades per account when one is trading on a traditional market, there are very few such limitations with CFD trading. CFD trading is, in general, far less regulated and you can open an account for £1,000, although some CFD brokers may have higher requirements for a minimum deposit amount. Also, you can enter a CFD trade concerning the value of stock of a company that is, say listed on Wall Street market, even when the actual market is closed, i.e. you can trade 24/7, regardless of the market in question.
Hedging
Trading CFDs and trading on traditional stock markets isn’t mutually exclusive. A lot of people who are long-term traders on the stock market are also into CFD trading. And this is not only due to the fact that CFD has some advantages when compared to CFD trading, but rather because you can use CFD trading to hedge your portfolio, i.e. to secure yourself from losing some of the capital you have, due to the fact that some of your shares lose their value.
The best way to explain this is through an example. Let’s say that you own £10,000 worth of shares of some company. Then you simply short sell the same amount worth shares of that company via a CFD trade. If the shares of the company in question fall by 7% in the market, the amount that you’ll lose in value, will be compensated by the gain in the CFD trade. If you’re trading in a volatile and constantly changing market this would be a very smart thing to do.
How to Choose the Best CFD Broker for You
Now we come to the most important bit for every potential new CFDs trader, which is how to choose your CFD broker, what criteria, what parameters should you use when deciding on what company and what individual broker to choose. First of all, it has to be said that this clearly depends on where you live, what are your options, i.e. which brokers are available to you, how much money you have and what sort of CFDs do you intend to trade. However, there are few general rules that apply regardless of the other circumstances.
Many of you would probably think that whether a broker charges a fee or a commission is the first and most important criterion that should be taken in consideration. But, it’s not necessarily so. А broker than doesn’t charge a commission may end up being more expensive than a one that does. There are two kinds of CFD brokers, they are known as Direct Market Access (DMA brokers) and Market Maker (MM brokers).
DMA brokers always charge commission, and their commission are higher than the commission of MM brokers, that is, if the MM charges any commission at all. This is because DMA brokers always ask you to pay the actual spread prices. So if the actual bid price is £1.02 and the ask price is 98p, that’s how much they’ll ask, whereas the MM who wouldn’t be charging commission would increase the spread difference and give you a bid price of say £1.04 and ask price of 96p, simply because he doesn’t charge commission and he has to earn money somehow. So, if the contract that you’re trading is worth more, than you may lose more money.
Therefore, you should consider what type of CFDs are you interested in and then compare the ask/bid prices and the commissions of the brokers you’re considering. Also, DMA brokers will tend to charge you a certain fee for data transfer. This is due to the fact that the broker would have to obtain certain data from the exchanges and they’ll charge for this. Therefore, DMA simply transfer the cost to the client, i.e. you. MM generally won’t charge you for this. You should also take this fee into consideration when weighing what type of a broker you should hire.
Next criterion in the line of things you should consider before choosing a broker is banking options. How do you transfer the money to your trading account? One useful type is to try and open a bank account in the same bank where your broker has an account. Otherwise it may take up to 3 days before a transfer is conducted. If your broker accepts electronic payments, i.e. has an electronic payment system, this would be the smartest and least complicated option. However, you should know that only a broker that operates locally would accept such payments.
When it comes to opening an account, you should also check what the minimum deposit for an account is. It may be £1,000, it may be more, so it’s really up to you and how much money are you willing to deposit. Deposits are just one side of the coin; the other side are the withdrawals. You would surely want to be able to get your earned money with fewer complications and as soon as possible. One broker may want you to send an email, others via fax or post, and some may ask you to fill in an online submission form. You should look for the option that seems most convenient. Also, the withdrawal time may vary, it come be 3 working days, 5 working days, or perhaps even more.
Counters, i.e. the range of counters, are the next thing you should consider. Some brokers have more counters on their offer. This is not difficult to establish, since most brokers include this information on their websites. Now, even though a counter may be on the broker’s list, it still may not be available for short selling. You should ask the broker directly if you’re interested in short selling. We already mentioned that CFD brokers accept order types just like traditional brokers do. However, not all brokers accept all order types. Make sure what types of orders someone uses before hiring them as your broker. This may not seem as important, but it really is.
It goes without saying, but you should really not forget to check if the broker is regulated by the monetary authorities of the country where he’s operating. It is really important for the security of your assets. Different brokers may have different platforms. Some have online platforms, whereas other only offer desktop platforms. These days many brokers have mobile platforms. So, for example, if you think you’d be doing a lot of your trading from your smartphone, you should definitely look for a broker that offers mobile trading.
To sum up, it really comes to your needs and preferences. Whatever you do make sure that you have considered every aspect before you choose your broker. This is truly vital, since your profits and losses may depend on that decision. Of course, you can always change your broker if you’re not happy with what he was offering.