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Let's start with a briefing on CFD's... This is another trading instrument you may use instead of straightforward/margined stocks. Take a quick look further down this page for web addresses of CFD dealers, who provide full information on how a CFD works...
The letters "CFD" stand for 'Contract-for-Difference'.
A Contract-for-Difference is exactly as the name suggests. Whenever you think [your opinion] the price of a share is going to go up, it is very likely that somebody somewhere will take an opposite view to you, and think that the share price is going to go down. This creates an opportunity to place a type of cross-trade, if you like…
This is just like any other trade. The person you buy a property often sells it to you in the fear that the price of the property may come down in the near future. You buy the property taking an opposite view: that the price will go up. This, in simple terms, is a ‘trade’. It happens with property, with gold, with antiquities, with shares and indexes, anything where there are 'opposing' directional opinions. These 'differences' in opinion can be traded, through the contract-for-difference.
Taking a quick example... Assume, on Monday you saw a BUY opportunity in XYZ stock on your screen, which tells you that the stock is likely to go up. Somebody else, an individual just like you, somewhere [anywhere in the world] thinks the stock is going to go down, for whatever reason...
Now, in order for the two individuals to do a trade, one needs an ‘agent’ who puts the person who thinks the market is going to go up [you] with the person who thinks the market is going to go down [the other person]. This agent is the ‘broker’ or better known as a CFD-dealer. With state of the art computers, this 'agent' can see on his screen any person who wants to back his judgment that the market is going to go up, and another person who wants to back his judgment that the price is about to go down. The agent can potentially put the deal together, run a 'book', so to speak.
You can trade any leading stock using the CFD. Because our trading screens cover the leading stocks [example: 'Nasdaq-100-stocks' screen, or 'FTSE-100-stocks' screen], the CFD offers an excellent vehicle to trade these opportunities.
Assume the FTSE 100 index [the major UK stock market index] stands at 4,800 points, you think it will go up, and the other person thinks it will go down. Now, once you enter the market to take an ‘up’ position, the CFD-dealer simply matches you with the person who is taking a ‘down’ position. This matching thus neutralizes the dealers’ position so his risk is zero. He is simply the ‘middleman’ or matchmaker. For his trouble in matching the two parties, he charges what is known as a ‘spread’...
So, with the FTSE at 4800, he will quote two prices, eg., 4798 to 4802. This means 4798 to take a 'down' position, and 4802 to take an up position. That is a difference of 4 points. This is simply his profit margin [similar to an estate agent or realty agent who puts a buyer and seller together and takes a tiny 'cut']. There is always a two-way price quote [or bid & ask]. In this example, the person who takes the ‘up’ position buys at 4802, the other person takes the ‘down’ position at 4798. The difference of 4 is the market-makers commission.
If you have a few minutes, check out the following websites, which offer full, detailed information [including examples] of CFD stock trading. You will also find their buy & sell ‘quotes’ [similar to the 4798-4802 example above] online…
www.onlinecfds.com [click on
'About CFD's')]
www.etrade.co.uk [click on CFD’s]
www.cityindex.co.uk [click on CFD’s and “Learn More”]
www.deal4free.com [click on Share CFD’s]
www.gnitouch.com [click on CFD’s]
www.igmarkets.com [click on CFD’s]
www.stocktrade.co.uk/ourservices/ifx.html
Full information packs and demo CD’s, dummy software trading platforms
etc., are all supplied by most dealers/brokers free of charge - all you
do is ask/request online.
The great thing about CFD's [depending which way you look at them] is that they also offer 'margined' trading. You need only put up around 10% to 25% capital to trade.
Here’s a quick example of a CFD Trade...
Say it is Thursday 19th July. You see a BUY opportunity in Tesco, whereby the trend index in both the stock and the major [FTSE 100] index are aligned. The price is 2.75 per share. You call your CFD broker, or check on the internet [eg., above sites] for the latest Tesco CFD quote [most quotes are available online, in real-time].
The quote for Tesco is 2.74 to 2.76. You are ready to trade...
As you know, this means that you have to buy the stock at 2.76 to take an ‘up’ position. Somebody somewhere else [whom you will never meet, because the trade is done by the broker/their computer] will take a ‘down’ position at 2.74 [the lower of the brokers quote]. The difference of 2 points is the brokers' profit.
Now, assume at around 4:00pm the same day, Tesco stock hits 2.91, a gain of 15p since the start of the trade. Remember, you entered the market at 2.76. Now, in order to close your position and take your profit, you once again call the broker or check online for the latest quote, ready to exit your trade and take your profits early...
This time, the quote is 2.90 to 2.91. In order to ‘sell’ your position, you have to take the lower of the two quotes, which in this case, is 2.90.
The net result in this example is:
Opened an UP position @ 2.76
Closed the position @ 2.90
TOTAL PROFIT = 15p
The above profit is per share. So, if you traded 1,000 shares, then the profit would be £150 [15p x 1000 shares]...
More importantly, the capital requirements to buy 1,000 shares would have been 2.76 [buying price] multiplied by 1,000 shares [quantity] multiplied by approx 25% [typical margin requirement for trading CFD’s, some CFD dealers offer 10% margin], which equals £690.00.
That is a profit of £150 on £690 capital, or 21.7% return.
Most CFD brokers require you to place around 10% to 25% deposit on the value of the shares to trade CFD’s. One of the most popular, leading commission-free brokers is www.deal4free.com, who are certainly worth consideration [great trading platform] if you wish to trade CFD's. Also check out all of the other CFD brokers listed above.
Please note that CFD trading does require at least some experience from the brokers, to prove that you do fully understand the risks/rewards of this instrument [this experience could be in trading shares, or spread-bets, detailed next].
For the lesser experienced and those with less capital, there is a new instrument in the market: The MINI-CFD. Check out: www.finspreads.com/minicfds
If you are a beginner/novice to trading, and have very little experience and/or limited capital, then full CFD [as opposed to mini CFD] trading will not be for you right away. However, there is another instrument you can use to profit from stocks, and is a firm favorite among our UK based traders: Spread-Betting...
An Introduction To Spread-Betting...
Similar in some respects to the CFD, spread betting can be done on a large number of stocks. Some of the better websites to visit, in order to start learning how to make money with spread betting is www.cityindex.co.uk [simply click on the “Learn More” tab] or www.deal4free.com, both of whom offer quick-learning pages on their sites.
We start with a few opening basics about spread betting…
Firstly, do not be put off by the word ‘bet’ which carries for many people, a number of totally unnecessary, negative connotations and preconceptions. It is probable, the reason for classifying this instrument as a 'bet' is the tax-free status that it affords.
Spread betting is not like traditional betting, where a ‘bookmaker’ gives you ‘odds’ and usually ends up taking 100% of your original outlay. Spread betting is, in a nutshell, the offering of a ‘middleman’ in a cross-trade [very similar to CFD’s] between one party [you] and another party [another person like you who takes an opposite view on a stock price]. This is just like a CFD. To explain further...
For example, if you bet that XYZ stock will go up, then, unlike traditional betting, you are not betting against the dealer, but someone else [another trader just like you who could be on the other side of the planet] who has an opposite view of the market [he or she obviously thinks XYZ stock is going to go down, while you judge that it will go up]. For every pound won, there is a pound lost [or for every winner there is a loser, as the saying goes] - as in every other stock market transaction…
The spread-bet dealer is therefore simply an intermediary [rather like a broker] between the two parties. He is neutral. This is as simple as it gets, and creates a tradable marketplace where the spread bet dealer - a middleman - employs a rather sophisticated electronic-book/system which matches the buy/sell orders throughout the trading day [even overnight in some cases] automatically and instantaneously.
So, how do spread bets work?…
Firstly, you deal through a spread bet-dealer. There are a number of these in the city of London. These spread dealers will send you a full, detailed, easy-to-understand information package which covers just about everything you need to know [including many trading examples and illustrations, etc.] in order to start trading spread bets…
Below is a listing of the many leading players in the spread bet business…
www.finspreads.com
www.cityindex.co.uk
www.financialspreads.co.uk
www.igindex.co.uk
www.spreadex.co.uk
www.deal4free.com
www.cantorindex.com
Similar in some respects to ‘CFD’ trading, you can use spread betting to
back both rising and falling markets. Remember though, that spread-bets
are more geared towards the beginner. They tend to have wider buy/sell
spreads, but on the plus side, all profits are currently tax-free. So,
this is all food for thought.
Conclusion...
We have covered four different instruments [straightforward shares, margined stocks, the CFD, and spread-betting] in the last few sections. As mentioned earlier, it is entirely up to each individual trader which particular instrument he/she wishes to trade. Another instrument you may choose to trade is the 'option'. In the next three sections, we will cover both 'call' options and 'put' options in step-by-step detail, and an advanced favorite option strategy, the 'covered call'. You buy 'call' options when you expect a stock to move up. You buy a 'put' option when you expect a stock to move down. The next page focuses on 'call' options...
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