CFDs as an alternative to equity markets

Nowadays, earning money on the shares of global companies is easier than it used to be. You don't need to have many accounts on different stock exchanges to trade shares such as Google, Coca Cola, Amazon or your home PKN Orlen or Pekao. More and more brokerage firms are making it easier for their clients to access shares through contracts for differences that allow them to trade multiple shares, currencies and commodities from all over the world by opening only one account. This is an interesting alternative to the classic stock exchange.

Contract for Difference (hence the abbreviation CFDs) were born in the 1990s in London. Initially, they were treated as a kind of hedging (collateral), and one of the basic assumptions of creating such contracts was to avoid paying stamp duty, i.e. stamp duty.

Over time, CFDs have evolved and escaped the framework of the classic stock exchange and are now an important part of the over-the-counter (OTC) circuit. Over time, they began to gain popularity in almost all of Europe and beyond, in countries such as Canada, Australia and Japan.

In Poland there are also many successful brokers who tempt with an interesting offer and low transaction costs. CFDs at CMC Markets is one of many interesting options for earning money on actions (and not only) in our country.

However, there are countries, such as the United States, which refer to contracts for differences with great scepticism and compare them to bookmaker's bets (most likely due to the possibility of leverage, which is discussed later in this article). but it's a big exaggeration.

CFDs are basically an agreement between two parties - the buyer and the seller, and the object of trade are not only currencies or stocks, but also indices, bonds and all kinds of goods (usually metals, oil, gas or agricultural commodities). Both parties undertake to settle the difference between the opening and closing prices of the transaction at the moment of its expiry. When trading derivatives in CFDs, you do not have any ownership rights, so you do not have to physically own the instrument you are trading in; you do have the right to dividend.

What is the difference between traditional trading in shares and CFDs?

Apart from the aforementioned ownership right, it is certainly also the absence of stamp duty. However, CFDs are not tax exempt.

The aforementioned leverage, or leverage, is also an important divergent point. Leverage means that you can open a high-value position by investing only a fraction of that value in a trade. For example, if you have 200 zloty, you want to open a position 40 times as big as this? Use the 1:40 lever. But be careful: this doesn't mean you're sure to make 40 times that much. It would be too beautiful and easy. By choosing a lever, you automatically accept the risk of loss. Derivatives markets are in constant motion, and although technical analysis and experience allow us to predict to some extent the direction in which they are moving, we can never be 100% sure that the current trend will not turn against us. Then our transaction starts to lose value and we have to close the position with a loss, even much higher than our initial contribution (mentioned above PLN 200). Therefore, leverage (and consequently CFDs) have many supporters as well as opponents.

Better liquidity - i.e. playing for growth and decline - is undoubtedly a feature that speaks in favour of CFDs on equities. You can open long positions (buy, i.e. positions to increase) as well as short positions (sell = decrease) and profit from price increases and decreases. Remember, however, that by using the lever you accept the risk of loss.

Unlike trading shares on the traditional stock exchange, limited by opening and closing hours, CFDs allow you to trade virtually 24 hours a day, five days a week (excluding weekends). All trading takes place through multifunctional online trading platforms. This is undoubtedly an important advantage of this type of derivative trading. CFDs are also settled in real time and not, as in the stock exchange, at the close of a session.

It's worth opening a free demo account with a reputable broker and practicing trading through CFDs - maybe it'll be a "hit" for you and then you'll decide on real trading?