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How Contract For Difference Can Be a Powerful Leverage to Make Your Money Work for You

By Terence Teoh on 21st August 2015 in Tips for Success
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Contract for difference and Options have become some of the most popular leverage tools a trader has when investing. As you should already know, leverage is all about how to multiply your investment returns quickly. However, in 2012, there was only a very small population who knew about CFD and Options.

Why Aren’t CFD And Options Better Known?

The stock market is constantly developing and it’s only natural for certain things to be new to many investors, even the more experienced ones. CFD’s, in fact, aren’t very well developed in many regions including Malaysia which means a lot of people are missing out on using these tools. However, when you know how to use these to your advantage, you can see a good route with the international market and have a lot of success in shorter time frames.

What Is A Contract For Difference?

A contract for difference or CFD as it’s also known by is a contract where two people will trade. The two parties trade the price difference of stocks, usually for a fraction of the actual price. In most cases, the fraction price is about 10% but it can vary depending on the buyer, seller and stock.

An Example of CFD

Let’s say you owned eBay stocks, and you thought the prices would rise to $650 within four weeks. However, another trader believed the prices would fall to $600. The two of you would use a broker and create a contract for difference. You would need to pay 10% of the stock prices, say $62.50 as the stocks are currently worth $625. In a month’s time, the prices reach $650; you can close the contract and earn $25 for every stock sold. That is potentially a 48% returns; however, if you weren’t to use a CFD and bought the stocks normally, then the return would be less than 5%. It’s still a good price but through leverage, it can make all the difference. CFD is explained in this page: https://www.beyondinsights.net/news/formula-consistent-success-stock-market-smart-investor/

What Are The Advantages Of Using contract for difference?

First of all, you can trade with less capital but still have the ability to build your stock market portfolio. This might be more suited for those starting out but still, anyone can use contract for difference if they want to. Secondly, this is a great option to have and you can trade whether you think the market is going to rise or fall. More opportunities become available to profit from also and it’s generally a good way to have a mix of stocks under your belt. You can even protect yourself against those sudden market movements too.

Leverage From Brokers Mean Loans

You might not realize it yet, but when you use the leverage offered by a broker, it means you are taking a loan. It’s like taking out a bank loan for your car; you need to repay the leverage even if the investment doesn’t work out how you hoped it would. There will also be interest charges to pay so you must remember this before entering into a contract for difference. Interest rates vary however mostly they are fairly reasonable charges.

Reward over Risk Ratio Still Needs To Be Used

A lot of people think a CFD is going to offer less risk and invest huge sums of money, but they still provide no guarantees. You cannot go over your chosen 2% risk when it comes to using CFD. You might be buying the stocks at a fraction of the actual price, but you should never risk more than necessary. You must somehow manage your money well and be wary of the risks there are.

Choose an Accredited CFD Broker

Most of brokers out there who deal with CFD’s stretch into their thousands and you have to choose very carefully. You want to ensure the broker you’re choosing is right for you and not simply the one with the least amount of interest charges. There will be brokers who offer mobile access which may not be suited for you. You must take a proper and conscious decision over which stock market broker is appropriate to choose from.

Only Certain Stocks Will Be Available For CFD

There must be a need or a huge demand on stocks in order to have a CFD interest. For example, if a company’s stocks were hugely popular then there is a bigger chance they will be available in CFD. However, if there is very little interest or demand for the stocks then they may not become available.

Choose Carefully

The stock market is full of investment options and sometimes, CFD is not going to be for you. This doesn’t suit everyone and you should stick to what you know and feel comfortable with. If your trading style is more suited to CFD then it’s time to think about this avenue. However, you do need to think very carefully about contract for difference and before trading, knowing exactly what it is and what it can do for you also.

 

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Terence TeohView all posts by Terence Teoh

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