Stock CFDs are an exciting alternative to buying stocks. Rather than own part of a company, you can buy and sell its stock with simulated money. However, before stocks trade with real cash, you should understand how they work.
This article will walk through how to trade stock CFDs in the UK.
Stock CFDs use an online broker to place trades. You want one that is easy-to-use, has low commissions on businesses, and offers good customer service when needed (e.g., if your password is stolen). You also want one that has a good deposit bonus for new customers. Popular ones include ETX Capital, Xtrade, Finspreads, IG Group, CMC Markets, Pepperstone, Saxo Bank, and BinaryTilt.
Once you have chosen, the customer service department will give you specific instructions on funding your account using either a debit card or credit card. You can often transfer stock CFDs during pre-market hours to avoid delays when placing an order during regular market hours. It speeds up the process because it becomes easier to trade once the money is already in your trading account.
Some stock CFDs are penny stocks, which means they don’t cost very much per share but have an extremely high price per dollar amount invested (i.e., $1 is worth 1000 shares). It means that if you have $1000, you can buy 50,000 shares of a penny stock! Even though the commission is extremely high at 1.5%, this still means that you will make well over 100% return on your investment every year. Penny stocks generally move at least 2% daily due to their small market cap.
For example, let’s say today is January 1st, and Company XYZ has an initial public offering (IPO) for one million shares priced at only 0.05 cents each. The company recently released its product to rave reviews, so everyone wants in before it becomes too expensive or difficult to get in on the ground floor. You can snag 10,000 shares with your $500 because even though they are worth 1000/share * 1Million total shares = $5 Million, they are only worth 5 cents each on the open market. On January 2nd, you wake up and see that people on major social media sites like Reddit and Facebook talked about Company XYZs products all night. Now everyone wants to buy some before its value goes up. The price of Company XYZ stock has risen to $0.25 per share, so your 10,000 shares are now worth $2500! You can cash out half your shares to take home 1250 dollars in pure profit even though it only cost you $500 to obtain them initially! Even if you decide not to sell your shares the next day, they could rise further because their success generates more buzz.
You also can ‘short’ any stock you want for free. It means that if Company XYZ is trading at $0.25 per share, you can short 100 shares for free because you are only required to put down a minimum of 1/100th of your total value to short it (i.e., 100x$0.25 = $25). If the price drops by half due to negative reviews or simply overreaction by investors who are quickly exiting their position, you can buy back the 100 shares for $12.50, which is 50% lower than they were initially worth! The initial investment was only 250 dollars because your broker covered another half when you bought the 100 shares short.
You’re beginning to see how easy it is, but some risks are still trading penny stocks. Your broker can’t stop a crash from happening on a good day just because he wants the price to stay where you bought it at. Trading penny stocks is more of a gamble than a sure thing because of this.