ShareCFD trading offers a flexible alternative to traditional share trading byallowing speculation on price movements without ownership of the underlyingshares. In this section, we will focus on the mechanics, costs, and strategiesof trading share CFDs, highlighting their unique characteristics.
The Mechanics of Trading CFDs on Shares
In traditional share trading, you buy and sellshares directly at the market price, which means you take ownership of theshares. In contrast, with share CFDs (Contracts for Difference), you do not ownthe underlying shares; instead, you trade standardized contracts that representthem. Each contract typically corresponds to one share in the company. Forexample, if you want to open a position equivalent to buying 500 shares ofApple, you would purchase 500 Apple CFD contracts. CFD prices are quoted in thesame currency as the underlying asset. For instance, since Apple shares are USstocks, they are priced in dollars. If your account's base currency isdifferent, your profits may be converted, often with a small currencyconversion fee.
Leverage in shares CFDs allows traders tocontrol a larger position with a smaller initial investment, typically rangingfrom 5:1 to 20:1, depending on the broker and asset. For example, with 10:1leverage, a $1,000 investment could control $10,000 worth of shares. Thisamplifies potential profits from small price movements, making it attractivefor traders. However, the downside is that losses are also magnified, meaningyou could lose more than your initial investment if the market moves againstyou. Unlike traditional shares, which do not involve leverage, CFD tradingrequires careful consideration of the potential for significant financialimpact.
The Costs
In traditional share trading, transactions are facilitatedthrough a broker who buys or sells shares at the market price. Brokerstypically charge a commission based on the trade's value. In CFD trading, thecosts are structured to reflect those in the underlying market. Providersgenerally match the market's buy and sell prices and apply a small commissionfee when you open and close a trade.
Advantage of Trading Shares CFDs
· Leverage: CFDs allow traders to control a largerposition with a smaller initial investment, amplifying potential returns.
· Short Selling: Traders can profit from both rising andfalling share prices by going long (buying) or short (selling).
· No Ownership of Shares: Since CFDs are derivative products, tradersdon’t need to own the underlying shares, reducing administrative burdens likeshare transfer or ownership fees.
· Access to Global Markets: CFDs provide easy access to shares listed onglobal exchanges, enabling diversification across markets.
· Liquidity: CFDs generally offer high liquidity, especially for popular sharesand major indices. This allows traders to enter and exit positions easilyensuring quicker transactions and better pricing.
· No Settlement Delays: CFDtrading does not require waiting for settlement periods, allowing for immediateexecution of trades and faster access to funds.
Disadvantage of Trading Shares CFDs
· HigherRisk Due to Leverage:While leverage can magnify gains, it also increases the risk of significantlosses, potentially exceeding the initial investment.
· Overnight Financing Costs: Holding CFD positions overnight incursfinancing charges, which can add up over time.
· No Shareholder Rights: Since traders don’t own the actual shares,they miss out on benefits like voting rights or dividends (though some brokersprovide dividend adjustments).
· Regulatoryand Broker Risk: It'simportant to remember that CFDs may not be regulated in all jurisdictions.Therefore, always choose a reputable and reliable broker to ensure the safetyof your investments and the integrity of your trading positions.
