An Introduction to Trading Share CFDs
A Share CFD is an undated contract that captures all parts of share trading, except that you do not have to pay the entire contract price to open a position, so you can trade on a margin from as little as Five pc of the underlying contract price.
Therefore, you can make high profits.
For instance, if you purchased 1,000 Westpac shares at $26.
00, you'd need to make a preliminary investment of $26,000.
On the other hand, if you traded in Westpac share CFDS, you would only need a margin of $1,300, Five pc of the total price of the shares.
If the value of the shares rose $1.
50, to $27.
50 a share, and you chose to take a profit, you would have made a profit of $1,500 ( $27.
50 - $26.
00 x 1,000 = $1,500 ).
Nevertheless, the return on your preliminary investment is higher with CFD trading than with standard share trading.
As you needed to pay the full $26,000 with the shares, your $1,500 profit is only a 5.
45% return on your investment.
On the other hand, it is a 115% return on your preliminary CFD margin of $1,300.
Though you can make high returns on your investments with CFDs, your losses may also be larger than your preliminary investment.
Let's imagine the same acquisition of Westpac CFDs / Shares went against you and you lost $2.
00 per share.
You would sell the shares at $24.
00 each, making a gross loss of $2,000 ( $24.
00 - $26.
00 x 1000 = -$2,000 ).
When trading shares, this is only a 7.
7% loss of your up-front cost of $26,000.
When trading share CFDs, this loss is 154% of your $1,300 margin.
Although there are risks when trading a geared product, CFD brokers also offer a number of risk management tools.
These include guaranteed stop losses, with which you can have your trade close if the value of the shares moves against you in the example above, you could have set a stop at $24.
50, which would have meant your gross loss would've been capped at $1,500, and that the position would have remained open had the share price increased thus enabling you to enjoy both security and unrestricted profits.
An additional benefit of trading CFDs rather than shares is the capability to go 'short'.
In the above examples, you purchased shares in Westpac with the expectation that their price would increase (going long).
Going short is when you sell shares hoping that their price will fall, and then buy them back at a cheaper price and turn a profit on the difference.
With standard share trading, this can only be done with a broker for an extra charge.
Therefore, you can make high profits.
For instance, if you purchased 1,000 Westpac shares at $26.
00, you'd need to make a preliminary investment of $26,000.
On the other hand, if you traded in Westpac share CFDS, you would only need a margin of $1,300, Five pc of the total price of the shares.
If the value of the shares rose $1.
50, to $27.
50 a share, and you chose to take a profit, you would have made a profit of $1,500 ( $27.
50 - $26.
00 x 1,000 = $1,500 ).
Nevertheless, the return on your preliminary investment is higher with CFD trading than with standard share trading.
As you needed to pay the full $26,000 with the shares, your $1,500 profit is only a 5.
45% return on your investment.
On the other hand, it is a 115% return on your preliminary CFD margin of $1,300.
Though you can make high returns on your investments with CFDs, your losses may also be larger than your preliminary investment.
Let's imagine the same acquisition of Westpac CFDs / Shares went against you and you lost $2.
00 per share.
You would sell the shares at $24.
00 each, making a gross loss of $2,000 ( $24.
00 - $26.
00 x 1000 = -$2,000 ).
When trading shares, this is only a 7.
7% loss of your up-front cost of $26,000.
When trading share CFDs, this loss is 154% of your $1,300 margin.
Although there are risks when trading a geared product, CFD brokers also offer a number of risk management tools.
These include guaranteed stop losses, with which you can have your trade close if the value of the shares moves against you in the example above, you could have set a stop at $24.
50, which would have meant your gross loss would've been capped at $1,500, and that the position would have remained open had the share price increased thus enabling you to enjoy both security and unrestricted profits.
An additional benefit of trading CFDs rather than shares is the capability to go 'short'.
In the above examples, you purchased shares in Westpac with the expectation that their price would increase (going long).
Going short is when you sell shares hoping that their price will fall, and then buy them back at a cheaper price and turn a profit on the difference.
With standard share trading, this can only be done with a broker for an extra charge.