Even though it has become much easier over the years to trade equities, thanks to the likes of the trading platforms and other similar trading instruments, equity and listed CFD Dealing is still a very risky business that shouldn’t be entered into without thinking it through properly and seeking the advice of a professional advisor.
At one time, the only way to trade equities was by instructing your broker over the phone, or being physically present at the stock exchange. Many trade instruments such as CFD, or Contracts For Difference, trading, financial spread betting, futures trading and the like hadn’t fully evolved until the last few years, so you had to content yourself with playing the market with cash, although all of these avenues have always carried considerable risk.
Since the inception of the CFD trading instrument, it has revolutionised trading in most markets. A CFD is basically an agreement to enable you to take advantage of the price difference between the position you took and the exit price of the underlying that you traded in. The big advantage is that CFD trading gives you access to many more shares simply by paying margin money, or a percentage.
If you wanted to trade the same amount of shares in the cash market, you would be liable for the full sum, and that is something that many cannot manage all in one go. The big difference between CFD trading and trading equities is that since the CFD is directly linked to the movement of underlying asset, you aren’t physically taking delivery or selling stock as you would with cash, the transactions follow the underlying movements, although there is always the risk that the market could move against you.
This is the reason why you only have to part with a margin of the actual cost of the amount of shares in which you are actually trading, usually 10-15%. This gives you the opportunity to trade up to as much as 15-20 times the amount of your actual capital, and if the market or stocks move in your favour, there are handsome gains to be made.
Never assume this is a quick and easy way to make money, as it can easily go the other way and you can lose big style, meaning that you have to find the remaining money to cover the debt you have incurred by trading more than you actually have. CFD trading is very much a double-edged sword and as mentioned previously, not something you should rush into without talking to a professional advisor.