CFD Trading

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Day trading with CFDs is a popular strategy. The leverage and costs of CFD trading make it a viable option for active traders and intraday trades.

What Is A CFD?

A CFD is a contract between two parties. They agree to pay the difference between the opening price and closing price of a particular market or asset. It is therefore a way to speculate on price movement, without owning the actual asset.
The performance of the CFD reflects the underlying asset. Profit and loss are established when that underlying asset value shifts in relation to the position of the opening price.
When trading CFDs with a broker, you do not own the asset being traded. You are speculating on the price movement, up or down.

CFD Example

Let us run through an example of a ‘contract for difference’ (CFD). Say you select a stock with an ask price of $25 and you open a CFD to the value of 100 shares.

If buying shares the traditional way, the cost would be $2,500. There might also be commission or trading costs.

However, a CFD broker will often require just a 5% margin. This will allow you to enter the same trade but with only $125. (Actual levels of leverage or margin will vary). This makes it an attractive hunting ground for the intraday trader. The risk and reward ratio is increased, making short term trades more viable.

When you enter your CFD, the position will show a loss equal to the size of the spread. This means if the spread from your broker is 5 cents, you’ll need the stock to appreciate by at least 5 cents to break even.

CFD vs Stock

Using the above example: Let’s say the price of the underlying stock continues to increase and reaches a bid price of $26.00
If you owned the stock, your holding is now worth $2600. A nice profit – ignoring commission or trading costs the trader realised $100.
However, with the underlying stock at $26.00, the CFD would show the same $100 profit – but it required way less to open, just $125. So in terms of percentage, the CFD returned much greater profits. Had the market moved the other way, losses relative to our investment would have been larger too – both risk and reward are increased.
There are of course other benefits to owning an asset rather than speculating on the price. We also ignored commissions and spreads for clarity. But the above does illustrate the relative differences in the two methods of investing.

Application

As you are day trading you probably won’t hold any CFD positions overnight. Instead, you’ll likely place a high number of CFD trades in a single day. To maximise your returns you’ll want to concentrate on liquid volatile markets. CFD trading with oil, bitcoin, and forex are all popular options, for example.

CFD Benefits

You may have already gleaned a couple of advantages above from CFDs, but let’s break them down and add a few more.

Leverage – CFD leverage is much higher than traditional trading. You can get margin requirements as little as 2%. The rate usually depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. Whilst low margin rates will allow you to take big positions with less capital, losses will also hit you harder.
Accessibility – The best CFD brokers will allow you to trade in all of the major markets. With so many markets that means CFD trading hours effectively run 24 hours a day. You’ll just need to check your brokers trading hours first.
Cost – CFD trading systems incur minimal costs. You will find many brokers charge little or zero fees to enter and exit trades. Instead, they make their money when you have to pay the spread. The size of the spread will depend on the volatility of the underlying asset. Note it is usually a fixed spread.
Less shorting rules – Some markets enforce rules that prevent you shorting at certain times. They can demand greater margin requirements for shorting as opposed to being long. The CFD market, however, generally doesn’t have such rules, as you’re not actually owning the underlying asset. This means no borrowing or shorting costs.
Less day trading requirements – Some markets require significant capital to start trading. This limits you to how many trades you can make, and in turn how much profit. An online CFD trader, however, can set up an account with as little as $1,000 to $5,000.
Diversity – Whatever peaks your interest, you’ll probably find a CFD trading vehicle. You can start CFD FX trading, as well as utilising treasury, commodities, cryptocurrencies, and index CFDs.

Low barriers to entry – As mentioned, you can start trading with Gear Capital for just $100. That means it is an excellent way for new traders to get a feel of the market without committing large sums.
Leverage– With a small amount of funds, you can use the facility of leverage to multiply the value of your capital. That means if you use leverage of 200:1 your $100 becomes worth $2000 and gives you much greater exposure to the market. The purpose of leverage is to increase your rewards, but remember it can be a double-edged sword as it can increase your risks too.

Steps for opening a real account at Gear Capital

Steps	Process
Step 1:	Open an account
Step 2:	Fund your account
Step 3:	Start Trading

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