When looking to start trading or investing, one of the first things you need to look at is what type of account would suit your style. One of the most popular accounts is an online trading account that uses contract for differences (CFD).
When it comes to CFDs, they are essentially a tax-free way of profiting from an asset that you choose by using margin (money from your online trading account) instead of paying straight away.
What Are Contracts For Differences?
Contract for difference is a financial instrument that allows traders to profit from rising and falling prices in the market without actually owning the underlying asset itself. The ‘difference’ part of the CFD is that you don’t own any underlying assets, but you are essentially trading on paper. It allows traders to take advantage of price fluctuations without purchasing an actual share in a company.
So if, for example, you thought that Apple shares were going to rise today because their earnings report was out and it beat analyst expectations by a long shot, you could trade using CFDs. You would have to go online and open up an account with your chosen online broker (Saxo Bank, for example), who offers CFDs. Next, deposit some money into your account, choose your desired amount of capital to trade with, and decide how much margin percentage you want to use when trading Apple shares.
Why Do Traders Use CFDs?
There are many reasons why traders use CFDs when trading stocks and shares. One of the main benefits is that you don’t purchase the underlying asset. There is no stamp duty or capital gains tax to pay for any profits made.
Trading using CFDs can also be advantageous because most online brokers that offer this service will offer tiny minimum deposit amounts and considerable leverage with which traders can trade. It allows anyone to get involved by opening up an account and depositing money into their name before choosing how much margin percentage they want to use in their trades.
Another reason traders choose CFDs is because of the flexibility that it offers when trading. You can trade shares and indices and many other assets such as forex, commodities, and even cryptocurrencies using CFDs. It makes it a very appealing option for investors looking to diversify their portfolios by trading more than one type of asset on the financial markets.
How are CFDs Traded?
There are many different ways to trade CFDs, but it all depends on what you choose to trade. If you want to invest in an asset such as Apple shares, you would go onto your online brokerage account and select your desired price of Apple shares and the amount of margin percentage you want to use.
You would then enter how much money you wanted to spend on this investment, the quantity of Apple shares purchased and finally your target price, at which point you wanted to sell for a profit. At this point, the online brokerage will calculate what margin percentage is required by using the amount of money that has been put into the trade and the target price.
This margin amount will be deducted from your trading balance, so you won’t need to add any money. Still, at this point, there is a difference between the current share price and your desired target price so that you can purchase another similar quantity of Apple shares. You would continue buying more Apple shares until your online brokerage tells you that you have used up all of your margin percentages. You might decide not to let you purchase any more Apple shares because they are too high compared to the current market value.
Trading using CFDs is an excellent way for traders to take advantage of fluctuations in the financial markets without purchasing an actual underlying asset. This type of trading offers many benefits, including flexibility, high leverage and no taxes on your capital gains.