What Are Stock CFDs?

Trading stock CFDs was once reserved for large financial institutions or professional clients, but not anymore..

In recent years, retail traders have flocked to CFD trading platforms to trade stock CFDs. But why? Well, using CFDs to trade global stocks has many advantages over traditional stock trading and we will go into these benefits shortly. For now though – what are stock CFDs and how do they work?

Trading stocks using a CFD platform is when a trader speculates (buys or sells) on the price movement of a particular share/ stock/ equity. However, unlike traditional stock trading, a CFD trader never actually takes ownership of the stock, instead they are only betting on its price movement. Trading CFDs is not just restricted to stocks – people can also trade CFDs on forex, indices, commodities, bonds, cryptocurrencies, plus more.

When you trade stock CFDs, you will BUY or SELL the stock you have chosen. If the price moves in the direction you anticipated, you will be making a profit. If the price goes in the opposite direction, you will be making a loss.

Compare Leading Stock CFD Brokers in 2021:

Broker     Official Site   Max. Leverage Regulations Min. Deposit    Spreads From Review
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200:1 $0 0.14 (Fixed)
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500:1 $100 From 0 pips
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500:1     $200 From 0.1 pips
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400:1 $100 From 0.9 pips
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400:1   $100 From 0.5 pips
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How Does Stock CFD Trading Work?

To trade stock CFDs, you will first need to open a CFD account – we have listed some reputable brokers in the table above. Once your account is verified, you will need to follow the steps below to start trading stock CFDs:

1. Fund The Account

You will need funds on your account before you can start trading. Deposit some funds and then proceed to the next step.

2. Find The Stock You Want To Trade

Which stocks are you interested in and want to trade? Are you looking to trade local stocks, or global stocks that interest you? Search the platform and find the stock/s you wish to trade.

3. Long (Buying) or Short (Selling)

Now you have located the stock you are going to trade, you will need to speculate on the stock by buying or selling its current price. Make a SELL trade if you think the stock price is going to drop in value, and make a BUY trade if you think the stock is undervalued and going to rise in value.

4. How Much?

Just how much are you going to allocate to this trade? Is it a big trade or a small trade? We’d recommend starting small to begin with! Open the trade ticket and enter how many units (stock) you are wishing to speculate with.

5. Risk Management

Before you enter the trade, consider adding some orders, like stop loss orders or a limit order (profit). Or perhaps you want to add a guaranteed stop-loss? Use these orders to protect yourself on the downside (and upside).

6. Open the Trade!

Double check you have everything as you want it on the trade ticket before clicking ‘Trade’. Take a moment to ensure all the details are accurate and then click trade once you are ready.

Stock CFD Example

  • The price of Coca Cola is USD $50.
  • You think its price is heavily overvalued and think it will drop in value.
  • Once logged into your CFD account, you place an order to SELL 10 units of Coca Cola at $50.
  • One week later, the stock price of Coca Cola is $48 and you decide to close the trade for a profit.
  • The drop from $50 to $48 is $2, or a 200 point (cent) movement
  • You would have made a profit of $2,000 on this trade (10 units x 200 point drop in price).

What Makes a Great Stock CFD Broker?

With a wide range of stock CFD brokers to choose from, finding one that fits your individual trading needs can become an onerous task.  Here are some key factors to consider:

  • Low Costs/ Fees

The amount you pay to trade is a critical factor when looking for a stock CFD broker. Each broker will have a different charging model, however for stock CFDs, expect to pay a commission and sometimes a spread charge, as well as overnight financing (swaps). Look for a well-rounded broker that does not charge too much, is well-regulated and has other benefits, like those listed below.

  • Strongly Regulated

Always trade with a regulated CFD broker, otherwise your money is at serious risk. Regulated brokers have been approved by a government-recognised entity and are seen as honest, with a solid board of Directors, fully functional, well funded and safe to trade with. Non-regulated brokers are none of these things and must be avoided at all costs.

  • Plenty of Tradeable Markets

Look for a stock CFD broker that offers a full range of global stocks on their trading platform. This is critical if you are hoping to trade stocks! Not all brokers offer stocks on their platform so save yourself some time and go direct to their ‘Market Info’ page to see if they offer the instruments you wish to trade.

  • Quick Funding & Withdrawing

Ensure your stock cfd broker offers a range of easy and fast funding options, with no (or low) added charges for making deposits.  The same applies for withdrawals; your broker should be able to return your money quickly, with no charges applied.

  • World-Class Trading Platform

There are a range of trading platforms to trade on and each broker will have something different to offer. Many will offer the popular MT4, MT5 and cTrader platforms, while many others also offer in-house built platforms that are often more customisable and user-friendly. The key here is to test out a few different platforms in a demo environment to see what you like.

How Is Stock CFD Trading Different From Traditional Stock Trading?

There are quite a few differences between stock CFDs and traditional share dealing, some of these are listed below.

Short Selling

Traditional share dealing only lets you make a profit via buying a stock and seeing its price increase. However, with CFDs, you can also profit by ‘shorting’ a stock. Shorting is when you enter a SELL trade in anticipation of the stock declining in value. Stock CFDs can also be used as a hedging mechanism, if you own an existing share portfolio.

Leverage

CFD trading is a leveraged product, which means you only need to deposit a small fraction of the full value of the trade. Leverage enables traders the ability to increase their purchasing power and make profits (and losses!) with a multiplier effect. Most CFD brokers will allow leverage on stocks of 5-10 times of the actual total value. As an example, an initial investment of $5,000 can potentially be worth up to $50,000 worth of stocks!

   Global Stock Markets

You can trade CFDs on most financial markets from around the world, all from one CFD account. This means you can typically access stocks from outside your local jurisdiction. For instance, an Australian can trade stocks from the US, UK, Europe and Asia.

    Faster Settlement

Buying stocks via traditional stock dealing will usually take 1-2 days to be settled. CFD stocks can be traded whenever the underlying exchange is open and there is no settlement period. This flexibility makes it far easier to enter & exit trades.