Your guide to trading equity CFDs
Using contracts for difference (CFDs) to speculate on the price direction of different asset classes has become hugely popular in recent years. Instead of the traditional method of just buying shares in a publicly-traded company, CFDs allow users to buy and sell shares, or equity CFDs, to potentially profit from both rising and falling markets. Read on to learn more about it and how to get started!
What are Contracts for Difference (CFDs)?
When answering the question 'What does CFD mean?' the simplest definition is that a CFD is simply a contract between two different parties (the buyer and the seller) to exchange the difference in the value of a given asset or financial instrument, from the time the contract is opened to the time the contract is closed.
When trading with an equity CFD broker, the buyer is the client or trader and the seller is typically the broker. There are some distinct features that are unique to CFD trading, such as:
- Ownership - When trading CFDs, the trader does not own the underlying asset, they are merely speculating on the future price direction of the asset.
- Leverage - With CFDs, traders can utilise leverage and trade on margin. This means that traders can control a large position with smaller capital. For example, a retail trader may be able to access 5:1 leverage for share CFDs. This means a trader could potentially control a position with a value of $5,000 with just $1,000 in their account. But, while it could amplify gains, it can also amplify losses.
- Trade long and short - CFD traders can actually trade both long and short and potentially profit from both rising and falling markets if there trade direction is correct. This is perhaps one of the biggest differences between CFD vs equity trading. In the latter, the trader can only buy equities (shares).
- Flexible holding times - CFDs allow traders to hold trades for seconds, hours, days, weeks, months and longer providing useful flexibility in managing trading positions.
Before we look at the question 'How does CFD work?', let's first look at the different types of CFDs available and how to access them. Did you know that you can actually download the MetaTrader 5 trading platform provided by Admirals UK Ltd completely FREE?
With this platform, you can view live and historical prices of thousands of different CFD instruments including share CFDs! Start your free download now by clicking on the banner below:
The different types of tradable CFDs
Contracts for Difference (CFDs) are merely derivatives of other asset classes. They simply track the performance of that asset class. Because of this, CFDs can be traded on a wide variety of different asset classes and financial instruments. Users can trade:
- Equity CFDs on the price direction of Apple, Tesla, Facebook and others.
- Equity Futures CFDs.
- Commodity CFDs (gold, silver, oil, etc).
- Forex CFDs (EURUSD, GBPUSD, etc)
- Bond CFDs
- Index CFDs
- Cryptocurrency CFDs
- Exchange-Traded Fund CFDs
So, when it comes to answering the question: 'What is equity CFD?', it is simply a product that allows a trader to trade contracts for difference on different equities, or shares, where the profit or loss is calculated from the difference between the purchase and selling price.
With Admirals you can trade share CFDs on more than 3,000 stocks and shares from 15 of the largest stock exchanges in the world! This includes all the world's top blue-chip stocks such as Apple, Facebook, Tesla, HSBC, BP, BMW, Airbus and many more.
You can view the products available directly from the MetaTrader 5 trading platform provided by Admirals or through the Admirals Contract Specification page, as shown below:
A screenshot of the Admirals Contract Specification page.
As you can see above, there are thousands of different CFDs to trade on covering a wide variety of different asset classes. At the time of writing, there are more than 3,400+ stock CFDs to trade on and this will continue to grow as more companies go through initial public offerings (IPOs) to become a publicly-traded company.
For now, let's have a look at equity CFDs in a bit more detail and understand how they work.
Your guide to equity CFDs
Let's take a look at how CFDs work and look at an equity CFD example.
If a trader was bullish on a company's share price, such as Tesla, and expected it to go higher they may enter a long position.
- If the trader bought the stock at $1,544 and the market fell to $1,504 they would lose $40 if they closed the position as the instrument dropped 40 points.
- If the stock rose 40 points to $1,544 then the trader would potentially make a profit of $40 if they closed the position.
Illustration by Admirals
If a trader was bearish on a company's share price, such as Tesla, and expected it to go lower they may enter a short position.
- If the trader opened a short position on the stock at $1,544 and the market fell to $1,504 they would profit $40 if they closed the position as the instrument dropped 40 points and they were shorting or speculating the price would drop.
- If the stock rose 40 points to $1,544 then the trader would potentially make a loss of $40 if they closed the position, as they opened a short CFD position on the stock to try and profit from the price falling which it hasn't done in this situation.
Illustration by Admirals
Even though you do not own the underlying shares, it is still possible to receive equity CFD dividend payouts when the company do pay a dividend. Also, did you know that currently, at the time of writing, you can trade stock CFDs with Admirals? In fact, with a Trade.MT5 account you can receive:
- 0.02 usd commission for stock CFDs
- 0 fees for real-time quotes
- 0 fees for advanced charting tool and premium analytics
- 0 fees for bank and credit card deposits
- 0 fees for trading education
You can learn more and get started today by clicking on the banner below and opening a demo trading account:
How to trade CFDs
To start trading equity CFDs and other asset classes, simply open your MetaTrader 5 trading platform after your free download and follow through on the next steps to open a trading ticket.
- Open your free MetaTrader 5 trading platform provided by Admirals.
- To select an instrument simply click the View tab on the top menu and select Market Watch. In this window right-click and select Symbols to view all the instruments available to trade on. Select your individual symbols or group of asset classes on the left and press OK.
- Locate the symbol in the Market Watch window or type in the name at the bottom of the window. Then, simply drag it onto the chart.
- To open a trading ticket you have three different options available:
- Press F9 on your keyboard.
- Select New Order from the top menu.
- Right-click, select Trading and then New Order.
- Input your order type, volume, stop loss, take profit, etc.
A screenshot of a trading ticket on Tesla Motors Inc CFD from the MetaTrader 5 trading platform provided by Admirals.
When trading CFDs such as stock CFDs, having a strategy to identify high probability trading opportunities is essential. A sound trading methodology that has risk management at its core can help traders be consistent in their processes. Here are a few steps to consider when building your methodology:
1. Which range of instruments will you focus on? There are literally thousands of CFDs you can trade on with Admirals. Even if you just focus on just stock CFDs there are different regions. Will you focus on US stocks, European stocks, etc? You even consider filtering down further to focus on individual sectors, like retail stocks, energy stocks, technology stocks, etc. Having a focus is important.
2. Which style will you use to identify potential opportunities? Longer-term traders may use swing trading strategies to hold trades for several days and weeks, some will use day trading strategies to hold trades for hours and days. With share CFDs, you can use any style but consistency is important as that is how experience is built.
3. What risk management tools will you use? Trading is about winning and losing. Using risk management tools and techniques is hugely important to avoid losing too much on any one trade. Having a game plan on what your position size should be, where your stop losses and take profits will be placed is essential.
One of the best ways to get started is to use a demo trading account which allows you to trade in a virtual environment until you are ready to go live. This means you can test your strategies, ideas and theories first. Better yet, you can open a demo trading account for FREE.
Click on the banner below to get started today!
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.