No matter how good you are at trading stocks, it still involves risks, which is in turn, involves a lot of money. If you want to profit from the stock market in the most efficient way possible, Contracts for Difference or CFDs is the way to go. CFDs offer a number of advantages over the common stock ownership, and the money involved is a lot less than what you’d need when trading stocks. While it is impossible to pinpoint a “sure-win” method, you can improve your chances by planning a strategy for trading CFDs.
Short-term Trading Your Way to Success
Contracts for difference are typically short-term traded because of the nature of commodity. Short-term here means holding on to them for a period of a couple of minutes to a few weeks, as opposed to holding on to stocks for months or even years, waiting for the right change in value before making any significant moves. Contracts for difference are margin products, meaning small share price movements are magnified.
Another reason is the stamp duty exemption in Ireland and in the United Kingdom, allowing one to save an immediate 0.5% as compared to buying the underlying securities. Brokers of CFDs also charge just 0.1% each way, so you can just end up paying 0.2% in opening and closing a trade. When planning a strategy for trading CFDs, know that the cost of moving your “assets” is considerably low, which allows you to be more active in trading. Actively moving your CFDs may seem tedious, but it allows you to move in such a way that you’ll end up profiting from every trade you make, no matter how small that margin might be. At the end of the day, the small increments you earn from short-term trading add up to a sizable amount.
Short Term vs. Long Term: Is it okay to sleep on your CFDs?
Most CFD traders know that these contracts for difference should not be used if you want to hold a position in the markets for months on end. The reason is that you will get charged interest on the amount of the contract, and interest will mount up if your treat CFDs as investment instead of just trading them. If you are planning to invest your hard earned money for the long haul, it is better to spend it on something that does not require a maintenance charge, unlike CFDs.
But if you are savvy enough to figure this expense into your profit calculation, holding on to your CFDs like you would actual stocks would still be worth your while. The interest charged is over two or three points over a base rate, which is around up to 9% per year, charged on the total value. Short-term trading on the other hand, would have you pay an interest of around 3%. But if you have done your research, and your trading instincts are telling you to hold on for a bit, planning a strategy for trading CFDs could be profitable.
CFD is a leveraged product, so a long position could be very profitable with due diligence and sheer luck. You pay just 10% of the value of the underlying security to open the position, and a 1% increase of the value per month would give you more than enough to pay the interest. The rest could be profit, amounting to around 30% in the year, which is something you can’t simply ignore. As long as you do your research and consider your costs and pay back, CFDs can be a viable long-term investment.
Be a Responsible CFD Trader
As with trading stocks, it is your responsibility to make sure that you don’t suffer losses that you can’t bear. Again, there’s no sure-win formula with CFDs, and there’s no guarantee that you won’t lose money. So when it happens that the value of your holding has fallen, do not get tempted to throw more money to your CFD dealer like CMC Markets just to maintain your position. Well, you can do so if you only plan to trade a fraction of the money on your account, because you are still leaving a remainder as a buffer to ensure that you live to trade another day. Planning a strategy for trading CFDs means doing away with the possibility of gambling your hard-earned money only to see it disappear in the next series of clicks.
Be it short term trading or taking a long position, planning a strategy for trading CFDs is important if you want to turn a profit. Short term trading has been the go-to strategy, as actively trading your assets can result to a maintained profit growth in a matter of minutes or up to a couple of weeks. Long term trading on the other hand, requires due diligence, because you need to research as well as trust your instincts if you want to treat CFDs as a long-term investment.