As we’ve mentioned in our beginner’s guide to CFD trading, contract for difference, also known as CFD is an instrument that allows you to gain access to a suite of financial assets in the market such as indices, shares, FX and commodities and most recently, cryptocurrencies such as Bitcoin, Ethereum or Litecoin and can be traded with brokerages such as IG which execute the trades on your behalf.
On the other hand, CFDs are preferred for its low-cost margin as you are not purchasing at the full price of the asset. For example, even though the asset could cost $1000, you are putting a 10% margin on that amount. So in cases like cryptocurrencies, you can trade with a relatively lower capital outlay despite their actual value.
Also, as the CFD name implies, you are entering into a contract with the brokerage based on the difference in your positions. Combine that with the low capital outlay and you are looking at a much higher profit margin than usual trading methods.
Essentially, you are looking at a much wider portfolio to work with, and at a budget that’s comfortable within your financial means.
To give you a good inkling of what you can do with CFDs, consider the following assets that could potentially raise your profit margin, at a fraction of the cost of traditional trading methods.
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Shares is one of the most established asset you can look at, and with CFDs you will have the flexibility of trading with multiple shares. IG, in particular, gives you access to more than 8,000 global shares CFDs. In the case of CFD trading with shares, the benefits are multi-fold as compared to the traditional method.
For one, trading shares with CFDs also gives you dividends as though you are holding the shares. But instead of pumping in a huge capital overlay, CFDs let you enjoy that same benefit at a fraction of the cost. Leverage, as we have discussed in our beginner’s guide, is an important element that lets you minimise your initial capital but amplify the profit margin (and your loss margin too). But considering there are other benefits such as the absence of stamp duty on returns, the overall benefits of trading share CFDs is worth your investment.
Bear tip: just like traditional share trading, it’s important for you to be updated about share movements in real-time. More importantly, you also need to ensure you can access the trade and adjust it accordingly at a moment’s notice.
Unlike the typical stock brokerage, you don’t have to wait for your broker to execute the order to buy or sell. All you need is an online account with a brokerage and do it via the desktop or even your mobile phone. The latter is especially useful to have with almost instant access to closing your trade positions. IG, for one, has a mobile app that updates you with the latest market movements, and gives you access to instantly buy or sell your assets.
Learn more about shares trading.
The current talk of the town, cryptocurrencies had been the talk of the town in the trading market. The value of cryptocurrencies hit a record high in December 2017, reaching close to $20,000 for a bitcoin.
But as we’ve mentioned earlier, what trading CFDs can do is let you have a fraction of the pie, without actually buying the whole pie, making it more wallet-friendly for traders.
CFDs act in a similar manner to your usual trading products – they all carry certain risks. In order to manage such risks, you can put automatic stop-losses at the level you indicate. These stops come in useful during periods of high volatility when you are unsure when the market would move against you.
You can further mitigate the risk by placing guaranteed stops which are only payable when your stop is triggered. Such measures would allow you to potentially cut your losses early and preserve your capital for future investment.
Bear tip: With cryptocurrencies, there’s still a relatively unknown element to it. A good strategy for this particular asset, or for any others in fact, is to hedge your portfolio. CFD brokerages such as IG also allow you to go short on cryptocurrencies and trade on the possibility of the value moving downwards. This allows you to hedge your portfolio and essentially protect yourself from any downwards moving cryptocurrencies.
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Foreign exchange, or more commonly known as forex for investors, is another institutional asset that has a wide-ranging advantage. Likewise, due diligence has to be done before you trade on forex, as you are dealing with the conversion of currencies which are subjected to global events that could shift its value against each other, upwards or downwards in a matter of seconds. Currencies are traded essentially in pairs, with you buying the base currency and selling the quoted currency concurrently. As such, any movement on either currency could have a huge effect, both good and bad.
CFDs, in this case, is especially beneficial as you are trading on leverage. This improves your profit margin with a low cost, based on the slight movements of each currency pair. Take for example, a USD/JPY contract, which awards 1000 yen per point of movement in the underlying currency pair. Rather than a huge capital outlay for a marginal profit, applying leverage in this situation affords a higher profit margin due to the lower initial cost, which is a fraction of what you have to pay to trade in that currency pair.
Bear tip: be aware that leverage is a double-edged sword - the amplified gains can also be seen in your losses based on the difference. Use guaranteed stops to help manage your losses and keep your portfolio intact without taking a huge dent. In such cases, knowing when you should quit and rebuilding your capital for the next CFD trade is an important strategy that you should adopt.
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Other assets to consider
Besides cryptocurrencies, shares and forex, there are more assets such as commodities, options and indices for you to trade with a CFD. We’ve covered the top three assets that you should consider, based on their potential and established investment track. You can learn more the different assets you can trade with a CFD via IG’s website.
Once you have a good grasp of which asset you are interested in, have a look at our beginner’s guide to CFD trading and match your trading strategy with our tips. With that, you are ready to take the first step towards CFD trading. To start off, try a demo account with IG, which offers you $100,000 in virtual funds to test your trading hypothesis before you embark on the actual investment journey.
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Cryptocurrencies are not legal tender currency and the trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they may not have the full protection offered by the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks and if in doubt consult an independent financial adviser. For more information on Cryptocurrencies, please refer to the following website for more information: MoneySense - Virtual Currencies. Representations of past performance are in no way an indication of future performance and such representations have not been verified by IG. No representation or warranty is given as to the accuracy or completeness of the information presented in this article. Please consult your own independent Financial Adviser when in doubt or if you require an investment advise.
This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views, opinions and recommendations expressed in the article are the independent opinion of GoBear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.