Advantages of Trading Shares with CFDs: A Guide to Leverage and Opportunity

Trading shares is one of the most popular ways for individuals to access the financial markets with the aim to fulfil a range of investment objectives. Shares trading is the practice of buying and selling stocks (units) of a company’s ownership on the stock exchange.

Shares trading provides access via equity ownership to some of the most groundbreaking companies in the world. It offers direct exposure to a company’s performance, whereby shares increase in value when the company is performing well and lose value during periods of poor performance.

For traders exploring alternative ways to access markets, share CFD trading is an avenue that potentially unlocks a new degree of flexibility and opportunities through leverage, which can be effectively used to best position your trades for the highest profits. CFD trading also offers increased accessibility to global markets with the potential to trade in areas and industries that are most appealing to the individual investor.

In this guide, we will explore the benefits of trading shares utilising CFDs, helping you determine if CFD trading shares can fit your individual circumstances, requirements, and goals.

Understanding CFD Trading

CFD trading has gained great traction in recent years thanks to a strong core concept. CFDs (Contracts for Difference) are financial derivative instruments comprised of a contract that tracks the price movement of assets on the global markets. CFD trading can be used across a wide range of markets, but it does not require ownership of any physical assets, unlike traditional stocks and shares trading.

Instead, it is a type of trader-broker contract that works by determining profits or losses as the difference between the asset’s market value at entry and exit of the CFD contract. It is essentially an agreement between the two parties to exchange the difference in market price from when the contract is opened to when it is closed.

CFDs are a highly versatile investment opportunity as they rely on trading the value of the underlying asset as opposed to the asset itself. They offer traders exposure to a range of global markets with forex, shares, and commodities among the most popular options.

When we look at CFD share trading vs. traditional stocks and shares trading, CFDs are leveraged while share trading is non-leveraged. Another key difference is that traditional stocks and shares trading is usually associated with a longer-term approach while CFDs can be held indefinitely but typically involve a very short-term timeframe, sometimes even just a few hours. CFD shares are frequently utilised by those wanting to trade tactically on shorter term price movements or hedge an existing position.

Both types of shares trading work the same in terms of returns, whereby profits or losses are determined by the size of your position and how the market has moved.

Advantages of Trading Shares with CFDs

Trading shares with CFDs comes with a number of advantages all based around a flexible trading concept designed to accommodate both new and seasoned investors. Leverage is one key opportunity. This allows individuals to trade without paying for the full value of the position upfront.

This essentially means traders can gain the same amount of market exposure and potential for profits by depositing just a fraction of the full market price (otherwise known as the margin factor). Different markets require different levels of margin, and it’s always given as a percentage. Leverage amplifies the effect of price changes, including gains, by allowing individuals to trade in a higher position than their capital deposit suggests.

Short selling is another potential advantage of CFD shares trading. This trading strategy aims to profit on an anticipated decline in the price of a stock or share, i.e. take advantage of markets where prices are falling. Also known as ‘shorting’ or ‘going short’, traders borrow the underlying assets (shares) of the company they wish to short then immediately sell them on the stock market at the current market price.

If all goes to plan, traders then re-purchase the assets at a lower price, return them to the original company and make a profit on the decline. As a derivative product, CFDs circumvent the limitations of traditional short-selling as there are no physical assets involved.

On a broader level, CFD trading offers the advantage of wider market access. CFDs can be used for share trading but they can also be used for a diverse range of asset groups from indices to forex, allowing investors to create a tailored, personal strategy and complement their wider portfolio.

They can also be used as part of a hedging strategy to reduce potential losses and best protect against inflation. For example, if traders hold shares in a market where a dip is anticipated, they can use leveraged trading to short-sell the market and hedge against downtrend possibilities.

Understanding the Prospects of CFD Trading

As with any complex financial product, CFD share trading is inevitably associated with a number of potential risks. While it has the potential to generate good profits, the stock markets are prone to fluctuations and sudden shocks which can mean trades lose value quickly and unexpectedly. That’s why it’s important for traders to understand the specific type of risk involved in order to create a strategy that best anticipates and protects against such risks.

The overall volatility of the stock markets should be a consideration for all traders. Trading in shares can be impacted by a range of factors such as geopolitical instability and even trader speculation, which have a knock-on effect on the price and value of assets.

When it comes to leverage, while traders may only deposit a small amount of the chosen asset outright, profits and losses are still based on the full trade value. In order to keep a leveraged trade open, traders will need to have the required funds in the account to cover their margin at all times, even if their position is at a significant loss.

Should the stock price drop and there is not enough equity in the account to cover the margin requirement, this is called a margin call and trades may be at risk of being closed or liquidated.

Trading plans should factor in the possibility of margin calls and ensure the trader can accommodate having sufficient funds in the account to cover for maximum losses. Due to stock market volatility, this may be difficult to anticipate but a qualified financial adviser should be able to offer support in building the best strategic approach and more specific advice related to the chosen companies and markets.

Starting Your Trading Journey with TMGM

When it comes to choosing the right platform for your CFD shares trading, you’ll consider a number of factors. You need the platform to be safe and secure as a priority so that you can trade without any concerns for the security of your finances. You should also choose a platform that is user-friendly and easy to navigate so you can focus on the most important task at hand – choosing the right trades for you and building a trading portfolio to suit your ambitions.

With TMGM, you can trade shares of the most popular stocks from all over the world. Our team is proud to have four reputable licenses so you can feel comfortable knowing that your funds are safe with us. We offer full exposure to the movement of stock prices with just a small initial deposit, allowing everyone from beginners to more seasoned traders to access a wide range of stocks to trade using MT4 and MT5. We also offer direct market access, complete price transparency, low commissions on shares CFDs and instant execution speeds.

Other key benefits are that dividends are passed directly to TMGM clients and we offer some of the most competitive prices on share CFDs. Some of our most popular shares include Apple, Netflix, Boeing, Tesla, Disney and Coinbase but our vast range can accommodate the personal preferences and interests of all types of traders.

Our platform is institutional grade, making the entire trading process smooth and enjoyable as you navigate the world of shares CFD trading with a powerful platform, lightning speeds, unique modular structure and advanced charting capabilities. You also have the option to manage multiple portfolios and access real-time price streaming and genuine exchange pricing.

Exploring Share Trading with CFDs

We hope that this guide has offered helpful insights into the advantages of trading shares through Contracts for Difference. Below, you will find a roundup of our key takeaways:

• There are a number of key differences between traditional stocks and shares investments and CFD share trading. The former is non-leveraged and typically utilises a long-term strategy. CFD share trading is leveraged and usually works with a short timeframe.
• With CFD share trading, traders can potentially access high profits as well as opportunities for diversification. Shares are available across a wide range of markets as well as different sizes and types of business.
• There are good prospects associated with short selling, where traders aim to make profits in failing markets on a short-term strategy.
• CFD shares can also be used as part of a hedging strategy to minimise losses in the context of the trader’s wider portfolio.
• Traders should research and understand the potential risks involved with CFD shares trading. Margin calls are one key risk associated with leverage, where traders risk their position being liquidated if their account capital cannot cover for losses in the case of market price drops.
• While this type of trading is generally more aligned with experienced traders, it can work for ambitious beginner investors as long as ample research is completed to ensure full understanding of potential risk.

As a cost-effective way of entering the financial markets, share CFD trading offers individuals access to the stock markets via an alternative route. This style of trading has a great number of advantages and can potentially work very effectively along with a strategic, informed approach.