What are Stock CFDs? Definition & Meaning - nextmarkets Glossary

Last updated: 20.05.2020
Warren Peacock
Author:
Warren Peacock
Adviser
CFD & Trading
Experience
16 years

If you’re interested in CFD trading, but don’t feel sure about whether it’s right for you, let nextmarkets help guide you through. We can assist you in educating yourself about the nitty-gritty of CFD trading, and offer tools and resources that enable you to reap the rewards it offers.

Our demo accounts and wealth of information will help you find your feet, and our groundbreaking platform and access to thousands of markets will give you the best opportunity to succeed. Read on to find out why nextmarkets is arguably the best CFD broker UK-wide.

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What are CFD stocks?

A Contract for Difference (CFD) is a mutual agreement between two parties to make an exchange of the difference between the opening and closing prices of a contract. CFDs are available for trade on a diverse range of more than 4,000 global markets.

CFD trading allows you to speculate on the movement of prices across multiple financial markets including shares, indices, commodities, currencies and bonds. Whether prices are rising or falling, you can profit with some wise investment in CFD trading. CFD trading is slowly making inroads into a wealth strategy by providing and additional investment type for those who wish to diversify their portfolios. With nextmarkets, traders have the opportunity to trade CFDs effortlessly.

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CFD vs stock: fundamental differences explained by nextmarkets

Trading stocks and CFDs are simple to do with nextmarkets. When you buy stocks, you choose your market and purchase assets at the given price, hoping to profit from the stock increasing in value. CFD markets list two prices: the first is the sell price (known as the bid) and the second is the buy price (known as the offer). The difference between the two prices is called the ‘spread’. Your CFD price is based on the underlying instrument price.

If you think the price of your chosen market will increase in value, you select ‘Buy’ (going long).  If you believe the market will decrease in value, you click ‘Sell’ (going short). The core difference between CFDs and stocks, therefore, is that with CFDs you can make a profit when stocks go down in value, if you make the right choices. If you want more detailed info on stocks, visit the page “What are Stocks?“.

Winning with CFD shares and nextmarkets

When you open a position with a CFD you must define CFD quantities that you wish to trade with, and your profit increases in accordance with every movement point in your favour. For example, if you forecast that oil prices are going to rise, you could put down a buy trade of 5 CFDs at a price of 5325.

If the market went on to rise 30 points, up to 5355, and you closed out on your position, you would make a profit of $150 – 30x the 5 contracts you originally bought. However, if the market moves in the opposite direction and the oil price falls 30 points, you would lose that same $150. To see how we help you succeed, visit the page “How to Trade CFD” on our nextmarkets platform.

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Diversifying with CFD vs shares

Like with shares, you can define the quantity of CFDs you want to trade. In equity trades, 1 CFD is equivalent to 1 physical share. When it comes to FX (learn also What is Forex?), indices, commodities, interest rates or bonds, the value of a single CFD will vary depending on the underlying instrument.

You can view the number on which you have a trade by searching for the corresponding ‘tick value’ in an instrument’s market info sheets. CFD trades are done in the market’s base currency. As CFD is a leveraged product, whereby you only require a small percentage of the full trade value (the margin) to open the trade, you will generally need more margin for larger value trades. Visit the nextmarkets library for more information.

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With nextmarkets you’ll feel like you have your very own CFD broker, ready to help you at a moment’s notice. Upon joining, you’ll get access to all we have to offer, including:

  • A demo platform with 10,000 EUR to experiment with
  • Competitive spreads and low margins
  • Bespoke trading ideas for you
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Why investors like CFD trading through nextmarkets

CFDs are a very popular way investors choose to actively trade in the financial markets. The reasons for this include:

  • CFDs are tax efficient, since they don’t require you to pay UK Stamp Duty on your profits.
  • The flexibility of CFD trading enables you to trade on both rising markets (going long) and falling markets (going short).
  • You can control a large value position with a much smaller cash investment.
  • They work as a hedging option, whereby you can offset any potential losses from your physical investments by going short.
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CFD trading: a margined product

CFD trading is what’s known as a ‘margined product‘. This means that you enter a trade by paying out just a fraction of a contract’s total value. Bear in mind that with leveraged trading there is always the potential for your losses to be greater than your deposits.

Simply put, this means you can invest a small amount of money in order to control a significantly larger amount, which can result in a hugely magnified return on investment. But you must always remember that any losses you incur will be equally magnified, so it is important to manage risk accordingly. Sign up for the nextmarkets demo account to practice strategies before using your own funds.

Who are CFD stocks for?

The ideal use of CFD trading is for investors who are looking for an opportunity to try and get even better returns on their money. But the significant risks to your money are not to be ignored, so CFD trading is not suitable for all people.

A good way to see how compatible CFD trading is with you would be to try trading on a nextmarkets demo CFD account before actually putting your own money into the equation. This is the ideal investment type for those who wish to play both sides of the market, whether faced with a bull or bear market.

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Choosing the right CFD shares

First of all, you need to have a thorough understanding of what this type of trading involves. So if you are still asking questions like “What is a CFD stock?” you need to do a lot of research before you’re ready. Once you have learnt all you need to know, you have to make a decision about which market you would like to trade on.

You can find some trading inspiration from the many tools and resources an account with nextmarkets provides for you. With so much choice at your fingertips, it is important to make the right decision on which trading opportunity you go with. There are some smart CFD trading strategies that really work for CFD trading.

Common CFD trader archetypes

The following types of people are most likely to get something out of CFD trading:

  • People who want to have control over what they invest in – nextmarkets offers an execution only service, so we won’t trade on your behalf with CFDs.
  • People seeking short-term investment opportunities – CFDs typically remain open for a matter of days or weeks rather than for the longer term.
  • People aiming to diversify their portfolio – with over 4,000 global markets to trade including FX, shares, commodities and indices, it’s safe to say your portfolio will become more diverse.
  • People who want autonomy over how passive or active they are – with CFD, you can trade as little or as often as you choose.
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Profit with falling CFD stocks

If you predict that a market is going to decrease in value, you can sell a market (a move known as ‘going short’) and potentially earn a profit from the falling prices. This is where the CFD trade differs from conventional share dealing, where you can only buy (a move known as ‘going long’).

For traders, this is often the buy-in in terms of CFDs, as it gives them the opportunity to make a profit even in tumultuous times. The trick is in understanding and reading the markets to know which trades to make and at what time, as these are time sensitive. Traders can get plenty of practice from their nextmarkets demo account.

How nextmarkets support CFD traders

At nextmarkets we aim to deliver the best CFD app, so we offer a wide range of resources to build your skills and assist with risk management, ensuring you can manage your CFD portfolio without having to constantly monitor open trades. These resources include:

  • Training and education to help strengthen your knowledge of CFD trading and make you a more confident trader.
  • Real-time market analysis that covers major events that could impact markets in the UK, US and EU, helping you plan accordingly.
  • Tools for managing risk, such as stop loss orders.
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Did you know

At nextmarkets, we are committed to ensuring your long term success as a trader. We put the following measures in place for your peace of mind, including:

  • Being backed by global investors Founders Fund, Peter Thiel, Falk Strascheg and FinLab
  • Funds up to 20,000 EUR are protected by the Malta Investor Protection Scheme
  • You can start trading with just 500 EUR

Register for free and get started today.

Markets open to CFD shares

nextmarkets opens our customers up to a huge choice of over 4,000 CFD markets. These provide a simple approach to trading as it allows a little more flexibility. It’s easy to get started, as we have CFD broker PayPal availability for even more convenient payments. The choices we offer are diverse, and include such vibrant markets as:

  • Foreign Exchanges with currency pairs like GBP/EUR, GBP/USD and JPY/USD.
  • Indices like the UK 100, Germany 30 and Wall Street.
  • Shares including Amazon, Rio Tinto and General Electric.
  • Commodities such as gold, oil and cocoa.
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Risks of CFD vs stock

Any market can make rapid moves in either direction at the most unexpected of moments. It can only take a political upheaval, a major earnings announcement or a natural disaster to profoundly impact FX (s. Forex trading strategies), bonds, equities and commodities. This market volatility can present unique and exciting trading opportunities, but it can also pose substantial risks. The nextmarkets trading platform allows traders to share in the excitement of all of these movements.

And if a CFD trade doesn’t go your way, it can be significantly more damaging than if a conventional stock investment doesn’t pan out. Experienced traders understand the importance of comprehending risk and finding effective tools to manage it – this is an essential component of a successful trading strategy. When risk management tools are used properly, potential losses are limited without restricting potential earnings. It will also help to know what is CFD.

Monitoring your CFD shares

Once your trade is placed, along with any stops or limits you deem appropriate, you will be able to observe your profit/loss fluctuations in real time from your nextmarkets account. You can also keep track of market prices, add new trades and close existing trades from your computer or mobile device.

When you are ready to close a trade, you can do so by clicking the button. Doing so will immediately realise your net open profit or loss, which will be reflected in your account balance. Your trade will be closed automatically if your stop loss or limit order is triggered.

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The CFD stock 'insurance policy'

One of the most popular ways to use CFDs among investors is as a tool to ‘insure’ against losses made in physical investment portfolios. The option to short sell CFDs to profit from falling market prices makes them a great tool to offset losses made. For example, if you hold £5,000 of shares in Barclays, and you become concerned that a sell-off is becoming imminent, you can put in a measure to protect your shares by short selling £5,000 of CFDs in Barclays.

This would mean that if the share prices of Barclays were to fall by 5% in the market, the loss you would take in the value of your shares would be cancelled out by gains made from your short sell CFD trade. By doing this, you protect yourself without having to go through the inconvenience and expense of liquidating your stock holdings. nextmarkets traders have access to these types of strategies through their CFD accounts.

Risk management strategies

Before placing a CFD trade, you should give some thought to your risk management strategy. A stop loss is a protective measure to close your position out at a predetermined price if the market moves too far against you, and it is a key risk management technique. This way your losses will be minimised, but they won’t be completely erased.

A limit order instructs a platform to close a trade at a price that is superior to the current market level, and helps lock in profit targets as part of a wider strategy. You can freely place standard stop losses and limit orders when you place a trade, or once a trade is open. And at nextmarkets we will always provide customers with the most successful trading tips and strategies.

Getting started with nextmarkets

There is tremendous potential in the world of CFD trading. If you wish to start trading CFDs, you need to first open your nextmarkets account with us to access the best free CFD software. We have a simple and secure application process which you can start any time. Once your application has been processed and verified, we’ll send your account details to confirm you are free to start trading.

Once you have your login details, you will be able to access our platform and have full use of all our powerful tools and resources. We are committed to supporting our clients’ journey to becoming successful traders, and as such we provide an extensive collection of educational material to help train you in fulfilling your potential as an investor.

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