How to trade CFD - try your hand at stocks, metals and goods
Hello dear colleagues forex traders!
The Forex currency market is quite naturally associated with the trading of currency pairs. Nevertheless, decentralization of the market gives freedom in terms of the choice of trading assets and, accordingly, earning opportunities. This is a significant advantage that allows you to earn on the price difference of instruments of the largest exchange platforms, while greatly reducing the minimum threshold for entering the “big game”. More details are in our today's material.
Where to look for CFD?
Traditionally, in the Forex market, the attention of the trader is drawn to currency pairs. However, adding another pair, in the MetaTrader4 market review window, a section of symbols with CFD difference contracts comes to my eyes.
This option gives you access to a long list of assets encrypted under strange icons, like the Twitter hashtag. These are tickers - symbols of instruments on world stock exchanges.
What is CFD?
Three hundred years ago, an auction procedure was established to determine the price of agricultural products, through transactions with equal supply and demand, conducted on a special platform - the exchange. Now this rule applies to all goods and raw materials, enterprise securities - stocks and debt obligations (bonds).
The Forex market stands apart, which, being decentralized in its essence, excludes the manipulation of the national currencies of states. Currencies are traded on the international interbank market without reference to the site and are not subject to regulation when the rate is determined by global demand and supply.
Speculators of the XX century introduced a new class of instruments - derivatives of exchange-traded assets. Futures and stock options, financial instruments and goods allowed to reduce the costs of commission payments to exchanges, avoid taxes and take advantage of leverage.
Leverage, or leverage, allows you to trade a package of assets (100 shares or 1000 bonds, etc.) for 10% of the cost. In this case, profit or loss is accrued in the amount of 100%.
CFD (Contract For Difference) is a derivative contract, a percentage of the cost is taken from a block of shares (or any other asset called “underlying”) equal to 1 lot. Unlike futures, a lot can be split like a currency to a minimum value of 0.01 lot.
Such pricing is an explanation of the occurrence of the contract. Securities of US or European enterprises are traded at prices ranging from tens to hundreds of US dollars. Futures and options prices reach the value of a used car. A small investor has only one way out - buying one share at a price of 5% of its value.
CFDs are an over-the-counter offer between a broker and a trader in which the purchase or sale price of an asset (from the broker's list) is taken as zero. A trader who has entered into a contract pays a deposit (2 or 5% of the market value of the asset), realizing that upon closing the position he will either receive a profit if the result of the trade is positive, or a loss will be written off the account.
CFD Tool Types
OTC assets, which include CFDs, are written out for any type of underlying asset if the pricing and settlement conditions are clear to both parties (seller and buyer).
As a rule, CFDs on shares of well-known brands are in demand. Quotes and codes of instruments (tickers) coincide in the trading terminals of Forex brokers and exchanges on which these securities are traded during the IPO.
Each exchange has its own index, which includes securities of the "flagships" of the country's economy ("blue chips"), calculated according to the methodology of the site. Buying or selling the index is possible through CFD contracts. The index value is relative, measured in the process of constant conversion of stock prices. Therefore, the underlying asset that determines the value and calculation of the difference for CFDs is the index futures.
Energy futures, as well as bonds and currency can be purchased as a CFD contract. The breadth of the offer, such as the basic instruments that define the contracts for difference, is limited by the offers of world exchanges and the broker's imagination.
Dividends on shares
If previously in the stock market shares were acquired in anticipation of future growth, the payment of dividends was not taken into account. The successes and business achievements of individual companies made it possible to provide dividends to shareholders in excess of the profitability of bank deposits, which caused speculative growth in blue chips purchased in the "dividend hunt."
Based on the results of each quarter (the frequency is determined by the meeting of shareholders), summing up the results of financial activities, the joint-stock company decides on the payment of dividends.
The percentage of net profit determined for payment is divided in total by the number of shares, after which a decision is made on the timing of payment.
Prior to the meeting of shareholders, a “cut-off” is made, the dates of which are known in advance. A special registrar company takes into account the owners of securities at the time of cut-off, so that in case of a positive decision to send the amount of dividends to their account.
Prior to the cut-off, any purchaser of a share is entitled to count on the amount of quarterly (annual) dividend payments.
CFDs, like any derivative stock contracts (futures and options), are not eligible for payment by law. The broker himself decides what to do in this case, so carefully read the conditions for payment and dividend accrual on the website and the texts of the Agreement.
The general practice of such payments on the part of the Forex dealer is as follows: if at the time of cut-off the client was in sales of CFDs on shares, the amount of dividends will be deducted from the account, and accrued - if CFDs on shares are purchased.
The amount is multiplied by the number of shares in the CFD specification. 1 full lot is equal to 100 shares. The dividend is calculated per share.
After the cut-off, a vote of shareholders and financial payments will take place after some time. In the trading terminal, on the broker's website and in the media, the dates of cut-offs, meetings, the size of dividends, and the results known in advance are published on the fact.
The size of dividends - expectation and reality have a strong influence on the value of securities, causing an increase or decrease (“dividend gap”). Investors and speculators carefully monitor information, corporate news in search of short-term guaranteed earnings.
Shares, as a rule, grow before the cutoff and fall on the fact of payment of dividends. Rumors of high payouts are causing trends, but a novice investor should consider the “external background” - a general economic upswing that could ignore negative news.
Pros and Cons of CFD
- Ideal for "small investor".
The cost of "entry" to world exchanges - from 5,000 US dollars. The minimum purchase is from 10 shares, the maximum leverage is 1 to 3, the average change in the stock price is about 30% per year. Forex broker gives the investor access to the stock market with a deposit of $ 100 and a leverage reaching 1 to 500.
- Low transaction costs.
When trading stocks, an exchange broker takes funds for maintaining an account, for a depository (storage and accounting of shares assigned to a trader), a percentage for maintaining a trading account, a commission for each transaction. If the trader decides to sell the shares, the broker will invoice for the use of the loan.
- Single account and terminal.
Shares are traded at various sites. An exchange broker divides accounts on exchanges and instruments. The complexity of access to the sites due to the requirements of the Regulators does not allow providing the client with all the exchanges of interest. As a result, the trader has to divide the funds by transferring them to different accounts for the purchase of currency, stocks or options, or open accounts with different brokers.
Trading platforms for different brokers may vary, there is no single coverage, as in Metatrader, in the stock markets.
Negative sides of CFD
- There are both risks of problems with permits (licenses) of the Forex broker, and the likelihood of "scam";
- An investor who incorrectly takes into account the “shoulder effect” is at risk of losing the entire size of the deposit;
- CFD does not give the right of ownership, therefore, the mechanism and fact of payment of dividends depends on the decision of the broker;
Secret CFD trading opportunities that everyone knows about but doesn't pay attention to
If you are tired of draining funds in currency pairs, you should try to use the stock market with predictable dividend yield. Open the S&P chart and evaluate the trend, mainly going one way:
Stock growth is predetermined by the market mechanism. Taking the direction of the trend as a constant, the investor has to choose the right portfolio of stocks and diversify investments (“lay eggs in different baskets”).
All Forex brokers provide access to CFD contracts. Therefore, the choice of the company is reduced to studying the ratings of forums and sites, licenses and reviews, which will ensure the protection of the portfolio.
Attention should be paid to Roboforex stocks, the broker is in the top 10 of any Forex ratings. The difference is that this Roboforex division specializes in stocks. If a trader decided to become an investor and receive income from the market, learn how to select securities and work correctly in the stock market using CFDs, it is convenient to do this in this company.
What strategies to apply for the investment portfolio CFD?
Work with stock CFDs comes mainly “from purchases”, growing trends are determined using moving averages with a period setting of 50, 100 or 200.
Oscillators (mainly MACD) are used as a filter to prevent overbought transactions, adding a position when the market is oversold.
Reliability of CFD purchase is determined by the tactics of Alexander Elder - “Three screens”. Widely used trade from the levels of Murray or DeMark.
If you have not traded CFDs before, at least you should not ignore this possibility. Exchange contracts provide much more variety than currency pairs, while possessing unique patterns. Perhaps, just the same from CFD tools you can collect your ideal trading portfolio.