In pursuit of more profit, traders are always on the lookout for new assets. It is essential for an investor to pick assets with high earning potential. One of the promising financial instruments is CFD – Contract for difference. So, what are CFDs, and how can you earn from CFD trading? Read on to find out.
Contract For Difference And Its Features
A contract for difference (CFD) is an agreement between a buyer (trader) and a seller (a CFD broker) that stipulates that the buyer must pay the seller the difference between the current value of an asset and its value at contract time, i.e., between the time the contract opens and closes.
A CFD is a derivative financial instrument that allows you to trade on different markets, providing greater market exposure. By trading CFDs, you can profit from price movement without owning the underlying asset.
To earn from CFDs, you need to find a broker with the best offer. For example, the AMarkets global broker charges no swaps on CFDs, excluding a group of non-expiring instruments such as COPPER, ALUMINUM, PLATINUM, NICKEL and ZINC. The total number of CFDs you can trade with this broker exceeds 200. The underlying assets include commodities, stocks, cryptocurrencies, metals, and bonds.
Why trade CFDs instead of stocks?
When buying a Stock CFD, the buyer gets the opportunity to trade the difference in the price of a share of a particular issuer. When the price of a security changes, a trader earns a profit if his predictions are correct. There is a significant difference between the stock and Stock CFD trading. In the second case, a CFD buyer does not own the underlying security. At the same time, depending on the broker’s trading conditions, the buyer can receive certain payments on these securities while simultaneously profiting from price changes.
Otherwise, CFDs are traded just like any other financial asset: you predict future price movement and open a trade. If you expect the price to rise, you enter a long position, and if you anticipate a decrease in the asset’s price, you go short.
Advantages of Stock CFDs
Although an investor doesn’t buy the shares per se, he can enjoy a number of benefits that are not available to him when trading in the stock market.
First of all, there is a significant difference in the leverage ratio. In the stock market, it’s very small; while trading CFDs, you can take advantage of up to 1:500 leverage. That is, margin trading (trading with borrowed funds) allows traders to earn even with a small deposit. As for the stock market, it makes no sense to enter it if your account balance is less than $5,000.
All Forex instruments are available for CFD trading, which offers a great variety of assets. To protect your account and manage risks, you can use a Stop Loss limit order, and to lock in your profit in time – use Take Profit orders. You can also place pending orders when you don’t have enough time to monitor the price movement.
Another important advantage of Stock CFDs is that you have access to a demo account. In the stock market, you won’t be able to use this helpful tool. A demo account allows you to study the historical performance of a particular asset, the features of the trading platform and backtest your trading strategies risk-free to make accurate forecasts and smart trading decisions.
By trading stock CFDs, you can profit from the trading itself and receive dividends paid per share of stock, i.e., a dividend-adjusted return. It’s worth noting that not all brokers pay them. To take maximum advantage of stock CFD trading, we recommend that you carefully read the terms and conditions of a particular broker.
Disadvantages of CFDs
CFDs have certain disadvantages. Some traders struggle to grasp the concept of CFDs. At first, it may not be clear to them how to trade an asset without owning it. But over time, they come to realize that CFD trading is no different from trading any other asset.
Also, leveraged trading involves a greater degree of risk. In pursuit of profit, some traders use high leverage and do not account for potential losses. In this regard, we suggest you apply strict money management, which is a golden rule of trading in the financial market.
CFD contracts should not be considered a tool for long-term investments as they have a limited duration and usually last for a few months. In addition, not all brokers provide access to CFD trading, which limits the opportunities for investors.
Like any other financial instrument, trading CFDs require a certain level of knowledge and a serious approach. Your broker is not a charity, and your earning potential depends entirely on you. The only thing a broker can do is provide fair trading conditions and guarantee the safety of funds in your account. Therefore, when choosing a broker to partner with, you should check its license and other regulatory documents and look through customer reviews.
Best US Stocks To Buy in Summer 2022
Although it’s too early to talk about stock market recovery just yet, the shares of some US companies deserve your attention. These include:
Johnson & Johnson (NYSE: JNJ), one of the largest companies in the healthcare industry. It researches, develops, manufactures, and sells pharmaceutical products, medical devices, and consumer products. In April, analysts raised their target stock price projections from $200 to $205 with a “better than market” performance. As of Q4, 83 hedge funds held stakes worth $7.4 billion in Johnson & Johnson.
Micron Technology Inc. (NASDAQ: MU) is a leader in providing innovative memory and storage solutions and a producer of computer memory and computer data storage, including dynamic random-access memory (DRAM), flash memory, and USB flash drives. The company is one of the biggest players in the semiconductor industry. The price target on Micron stock was raised from $110 to $113 at the end of March, with a “buy” recommendation. The company has excellent prospects, given its plans to expand the range of its products, as well as strong growth in storage and computing.
T-Mobile US, Inc. (NYSE: TMUS) is one of the largest American wireless network operators. In Q1 2022, the company saw a higher than expected increase in subscriber numbers. At the same time, T-Mobile US has the most reliable 5-G network, faster and more efficient than its rivals. Most analysts are optimistic about the company’s future.
NVIDIA Corporation (NASDAQ: NVDA) is a leader in the semiconductor industry. Earnings per share at the end of Q4 2022 were $1.32, $0.1 higher than analysts’ forecasts. Q4 revenue was almost 53% higher than the previous quarter and amounted to $ 7.64 billion. In mid-April, analysts upgraded their stock projections from “neutral” to “buy”, so the company’s shares can be considered an excellent investment.
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