CFD that is Contract for Difference trading is somewhat like share trading. The main principles remain the same. But there must be some differences certainly, and the biggest one is that you do not become the owner of the underlying financial instrument. What you own is the contract made between yourself and Olymp Trade.
As I said in the introduction, you do not become the owner of the asset like in traditional trading. You purchase a contract for a difference in the price at the opening and closing times. You own the contract and not the shares of the company.
Similar to trading shares, you can buy or sell CFDs. This means you are buying or selling the contract and not the shares. You do not have to deliver the underlying instrument while entering the sell transaction.
A huge difference is that CFDs are traded on margin so you put only a fraction of the real value of the transaction. It allows you to perform trades for a much higher amount than the sum in your account. The leverage you can apply is often high and this is also a reason why you should act carefully and learn a lot about CFDs before trading. High leverage not only lets you win a fortune but also lose one.
The CFDs are not subject to a stamp duty of 0.5% in the United Kingdom. Still, the profit continues to be taxed on the capital gains.
How to trade CFDs at Olymp Trade
Once you are logged into your Olymp Trade account, click on the asset name that is currently displayed. You must choose the option for currency pairs and then “Stocks”. All the available instruments will be visible together with the quote and recent changes in the prices.
You can also type the name of the financial instrument you wish to trade in the search box provided underneath the list of the assets.
With the asset set, you will need to decide on several more issues.
The first one is the amount of money you want to invest in a specific transaction (1). Remember that CFDs give the possibility of applying the leverage (2). Take a look at the chart below. The invested amount was 100 and the multiplier 10. This signifies that the trade would be conducted as if there were 10 times more money. In this particular case, it would be 1000. Think your decision well through as the leverage not only increases the gains but loses as well.
You have the possibility to set an auto-closing (3). You do not have to use this method, however, it can save you money. Its purpose is to close the trade automatically at the moment the price reaches the level you have previously selected.
As the trading is all about deciding whether the price will rise or fall at the time the trade expires, you will have to click a green or red button (4). If you select the green “Up” button you expect the price to go up. When you choose the red “Down” button, you anticipate a fall in the prices.
Below the color buttons, you will see the information about the height of the commission taken for this particular trade (5).
You have just bought a contract for the difference in the opening and closing price. You can view the details of your transaction after clicking two small arrows on the top-left side of the platform (number 1 in the photo below).
The trade is open, but you can still introduce some changes. You can adjust the levels of Taking Profit and Stop Loss. Moreover, you can just close manually the position instead of waiting until it hit the predefined Stop Loss or Take Profit level. Use this method when the situation is clearly developing against you and you anticipate a bigger loss if it stays open.
Note, the existence of the overnight fees. Make sure all the transactions are closed before the end of the trading session if you want to avoid the fee.
Pros and Cons of CFD Trading😊🙁
- High Leverage: CFDs allow traders to leverage their positions, potentially enhancing returns.
- Access to Global Markets: CFDs provide access to a wide variety of markets, including stocks, commodities, and indices.
- No Stamp Duty: Unlike traditional share trading, CFDs are not subject to a stamp duty in the United Kingdom.
- Increased Risk: The leverage offered in CFD trading can amplify losses as well as gains.
- Complexity: Understanding CFDs and the mechanics of leverage can be complex for beginners.
- Overnight Fees: If a CFD position is held open overnight, an additional fee may apply.
|Aspect||Share Trading vs. CFD Trading|
|Ownership||Share Trading: You own the underlying shares. CFD Trading: You own the contract.|
|Leverage||Share Trading: No leverage. CFD Trading: High leverage is available.|
|Trading Costs||Share Trading: Includes a stamp duty in the UK. CFD Trading: No stamp duty, but there can be overnight fees.|
Trading CFD stocks is similar to trading shares in major ideas. Nevertheless, you must remember what is different between these two and use this knowledge to your advantage. Read other articles about CFDs to widen your understanding of the contract for difference.
I advise checking how CFDs trading works on the Olymp Trade demo account. It is free of charge and you can use it as long as you need to. Learn all you can and practice thoroughly there before investing real money on the live account. More importantly, always be prepared to deal with losses, as you will most likely encounter a lot of it while you trade.
Write in the comments section below about your experiences with CFDs trading.
Quick Q&A Section🔍
- Q: What’s the main difference between CFD trading and share trading?
A: In CFD trading, you trade a contract based on the price difference of the underlying asset, not the asset itself as in share trading.
- Q: What does trading on margin mean in the context of CFDs?
A: Trading on margin means you only need to deposit a fraction of the full value of the trade, enabling larger positions with less capital.
- Q: Why should I use a stop loss in CFD trading?
A: A stop loss can limit your potential losses if the market moves against your position.
- Q: What is leverage in CFD trading?
A: Leverage allows you to control a larger position with a smaller amount of capital. However, it can also amplify losses.
- Q: Are there any additional costs in CFD trading?
A: Yes, there can be overnight fees if you hold a position open past a certain time.
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