Are you looking to get into stock trading CFDs in the UK? If so, you’re in for a treat because this article will give you tips on how to do just that. In particular, we’ll cover things like choosing a platform and broker, understanding spreads and margin requirements, and figuring out when to buy and sell.
What are CFDs, and how do they work?
CFD stands for Contract for Difference, and it is a type of derivative trading. That means they allow you to speculate on the price movements of underlying assets without owning them. If you think the price of a stock will go up, you can buy a CFD that tracks that stock. If the price rises, you’ll make a profit; if it falls, you’ll incur a loss.
CFDs have become increasingly popular in recent years, as it’s seen as a more accessible way to trade than buying and selling actual shares. It’s also generally considered riskier, as you can lose more money than you invest due to the fact that CFDs are leveraged products.
What’s the difference between stocks and shares?
Understanding the difference between stocks and shares is essential before you start trading. Stocks are units of ownership in a company, representing a claim on the company’s assets and profits. Shares, on the other hand, are simply pieces of paper that prove that you own a certain number of stocks.
When you buy or sell shares, you’re buying or selling ownership in a company. When you trade stock CFDs, however, you’re only speculating on the underlying asset’s price movement (in this case, stocks). You don’t own shares, so you can’t vote at shareholder meetings or receive dividends.
The benefits of trading stock CFDs
There are many benefits to trading stock CFDs as opposed to actual shares. Firstly, as we’ve mentioned, you don’t need to own the underlying asset to trade it, which means you can speculate on the cost movement of stocks without tying up large amounts of capital.
Another benefit is that you can trade stock CFDs on leverage, which means you can control a more prominent position than you would if you bought shares outright. For example, if you have a £1000 account and you’re trading with 10:1 leverage, you could control a £10,000 position. It can amplify your profits (or losses) significantly.
It’s important to remember that leverage is a double-edged sword. While it can increase your profits, it can also magnify your losses. So always use stop-loss orders and consider the potential for margin calls when trading on leverage.
How to open a CFD account
Opening a CFD account is relatively straightforward if you’re based in the UK, and you first find a reputable broker that offers CFD trading. Once you’ve done that, you’ll need to open an account and deposit some funds.
When your account is open and funded, you’ll be able to start trading stock CFDs. Remember, however, that leverage can magnify both your profits and losses. Therefore, you should ensure you understand the risks involved before placing any trades.
Tips for making successful trades
The most important thing is to make sure you choose a reputable broker. There are a lot of scams out there, so it’s essential to do your research and only trade with a broker that’s appropriately regulated.
It’s also important to have realistic expectations. Unlike shares, stock CFDs don’t entitle you to voting rights or dividends. And while leverage can magnify your profits, it can also amplify your losses. So always use stop-loss orders and consider the potential for margin calls when trading on leverage.
The risks associated with trading stock CFDs
There are many risks associated with trading stock CFDs. Firstly, as we’ve mentioned, you don’t own the underlying asset, which means you’re exposed to the counterparty defaulting on their obligations.
Another risk is that you’re speculating on the underlying asset’s price movement. Your profits (or losses) will depend on how accurately you predict the market’s future direction. If you get it wrong, you could lose the entirety of your investment.
Finally, leverage can magnify both your profits and losses. So always use stop-loss orders and consider the potential for margin calls when trading on leverage.
The bottom line
Stock CFDs can be quite lucrative, but they are generally considered riskier investments due to the fact that they are leveraged, which allows you to gain exposure to larger positions with only a small amount of deposit. When you trade Stock CFDs, you should do well to ensure you understand how the stock market works, the fundamentals of the share you are trading, and you should always make sure you have an exit strategy in a case your position heads in an unfavourable direction.