How to Trade Stock CFDs? Stock Market Basics

Have you ever wondered how trading shares with CFDs works? Trading stocks CFDs enables clients to get exposed to the price movement of various stocks without actually owning the underlying asset. As the name suggests, CFDs (contract for difference) are contracts between two parties in order to pay the entry and exit price difference. It is categorised as a financial derivative instrument because its price results from the price of the underlying asset.

The purpose of the stock market is to make online shares CFDs trading the exchange of securities between buyers and sellers easier so as not to have to call around the neighbourhood trying to find a buyer to sell shares for example. A stock market is really a more sophisticated version of farmers market, just linking buyers and sellers.

There is an important distinction to make though when it comes to the market. There is the “primary” market and the “secondary” market. The former is where securities are created whereas in the latter, investors trade securities that are previously issued without the issuing-companies being involved. The secondary market is what people call ‘’the stock market’’. It is vital for investors to understand that trading a company’s stock does not directly involve that company.

How to trade CFDs on stocks

Once you understand what a stock is and how it works, it is also important to study how you actually go about trading stocks CFDs.

In a nutshell, trading CFDs follows the below process:

1. Select a market
   Choose the stock market as your market to focus and plan your next trade.



2. Choose between buying or selling a CFD
   Go with buy if you believe the price of the stock will increase in value. Click ‘sell’ if you think otherwise.



3. Choose the size of your trade
   Select the number of CFDs you wish to trade. 1 CFD equals 1 physical stock in equity trades



4. Use a stop loss
   A stop loss order is a way to close the position at a specific price if that moves against you.



5. Keep track of your trade
   Monitor your trade and keep track of your profit or loss in real time. Close the trade

To trade stocks CFDs:

1. Open an account with an online broker



2. Research the stocks CFDs you want to trade



3. Choose how many stocks CFDs you want to trade



4. Choose your stock CFD order type through the best stock trading platform



5. Build and optimise your portfolio

There are two types of brokers. Those who are full-service brokerages and will supposedly offer you expert advice and manage your account but with a cost and the discount brokerages who do not give much attention to the above but are way cheaper. There was a time when only wealthy people could afford a broker as only the full-service brokers were available. However, with the Internet and all, more and more discount brokers were created. Because of these brokers almost all traders can now invest in the market. Brokers will also provide you with the best online trading platform to buy stock, which is the MT4.

How to trade in stock market

The stock market is a way for investors or brokers to exchange stocks CFDs for money, or vice versa. Buyers expect their stocks CFDs to rise, while sellers may expect them to fall or at least not rise much more. The stock market allows investors to speculate on the future of a company. Generally, stock prices increase gradually as companies expand their operations and earnings as the economy grows.

A company with increasing sales and profits will probably see its stock CFD rise, while a declining business will probably see its stock CFD fall. Private firms may decide to fund their business by selling stock. They will conduct an initial public offering (IPO) using an investment bank which sells shares to investors.

How to invest in the stock market

Trade the right stock CFDs

If you want to succeed by investing in individual stocks CFDs, you have to be prepared to do a lot of research as well as analyse a company. If you’re analysing a company, you should look at a company’s fundamentals – earnings per share (EPS) or a price-earnings ratio (P/E ratio). You can do this through the MT4, which is the best day trading platform for beginners.

• Avoid individual stocks CFDs



• Bear in mind that for every seller in the market, there’s a buyer who is also sure they will profit. An alternative to individual stocks CFD is an index fund, which can be either a mutual fund or an exchange traded fund (ETF).



• Create a diversified portfolio

Owning a diversified portfolio of stocks CFDs is important because it reduces the risk of any of the stock CFDs in the portfolio affecting the overall performance.

There are many ways to create a diversified portfolio, depending on whether you want to be an active or passive investor.

Be prepared for a downturn

The hardest issue for most investors is a loss in their investments. As the stock market can fluctuate, you will have losses from time to time. As long as you diversify your portfolio, any single stock CFD that you trade should not have too much of an impact on your overall return.

Stay committed to your long-term portfolio

Investing should be a long-term activity. Some traders overlook the daily financial news, in order to develop patience, which is an essential skill if you want to invest for the long term.

A good strategy for beginners is to set up a calendar and pre-determine when to evaluate your portfolio.

Avoid short-term trading

Knowing whether you’re investing for the long-term future or the short term can also help determine your strategy. Sometimes short-term investors can have unrealistic expectations about increasing their money. If you are investing for the short term, you risk not having your money when you need it.

DISCLAIMER:

This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.