What is a CFD?

CFD stands for Contract For Difference, a contract you buy in which you profit from changes in the prices of stocks and shares.

If you buy a CFD on a stock or share that is £10.00 and the price increases to £10.50, then you gain from that change in price. So if you bought 1000 CFDs of that stock, then your profit is £500.

You can also predict a short in a cfd and earn from a drop in a stock or shares price.

CFDs are a very popular, and because they are traded on leverage, where the leverage is typically 9 to 1.

Some providers, it can be up to 21:1.

A trader with a small investment can make nice profits from trading the stock market by using CFDs. A typical stock trading system may make a 30% return per annum, which on a £5,000 investment, is £1,500 profit in one year.

With 10:1 leverage, the same system can now produce a 400% return in one year,

Therefore traders, having no special skills, have learnt how to use a CFD system, and are now living partly or completely from their CFD trading because of this ability to produce larger profits compared to long term stock trading.

The pro’s of CFD trading are:

Go short CFD as well as long

Being able to do short trades significantly increases the profitability of many trading systems, as you’re able to profit from both falling stock prices, as well as rising stock prices. You can profit from a falling market, as well as a thriving market

Leverage

This increases the chances of profit in a cfd trading system by ten to twenty fold.

For example, if the margin requirement by the CFD provider is 10%, this means that with £5000 of funds, you can buy £50 000 worth of CFDs (10 to 1 leverage). If you have a system that without leverage produces a 40% return and a 7% drawdown, then with leverage, you will produce a 400% return with a 70% drawdown. Your trading results can therefore increase dramatically.

Shorter time frames in trading

Because of the leverage available, and the ability to short CFDs, you can profit from smaller moves in the underlying stock prices.

Meaning that you can make significant profits within as little as a day, rather than having to hold onto stocks and shares for years to see any decent profit.

Automatic stop losses

Unlike stocks, you can place automatic stop losses for CFD positions on your cfd trading platforms. This helps by:

Firstly, they will allow you to leave a trade instantly, rather than leaving it till the day has ended to see if the stock price has gone past your stop loss, then having to exit the following day. This way you will be less likely to lose money on your cfd contracts.

This is beneficial for people who the usual 9 till 5 day job.

Placing your cfd contracts can take as little as 15 minutes per day and can be left down toy you or your broker to keep tabs on, meaning that this route is simple and can be far more profitable than other investment routes.