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Options Trading Overview & Strategies
Just mention options and even some of the most seasoned investors will have the same knee-jerk reaction: вЂњTheyвЂ™re too complicatedвЂ¦ too riskyвЂ¦ too expensive.вЂќ
But this is just that — a knee-jerk reaction. In reality, if you know what youвЂ™re doing, options trades can be quite straightforward and open up a world of relatively safe alternatives to making money with stocks. In fact, options can even be a great deal more inexpensive than stocksвЂ¦ and deliver greater profits in a shorter time frame!
Options really shine when the markets are volatile. You can use them to leverage the movements of stocks or other tradable assets as they swing both up and down. And right now — with uncertainty rife in economies and governments all over the globe — is a perfect time to play the options game as the markets experience wild mood swings.
But what exactly are optionsвЂ¦ and how can you use them to your investing advantage? In this primer, weвЂ™re going to give you the basic rundown on what options investments are and how to place a very basic trade.
So What the Heck Are Options Anyway?
HereвЂ™s the best way to think of options: TheyвЂ™re bets on the future. Essentially, options are contracts that grant the right — but not the obligation — to buy or sell a stock on or by a certain date at a set strike price. TheyвЂ™re a type of financial instrument known as a derivative because options contracts derive their values from underlying assets. For this primer, weвЂ™re going to assume that the underlying assets are stocks.
And simply put, there are two basic forms of these contracts: call options and put options
Basic Forms of Options Contracts
We call the right to buy a stock a call option. These are bullish bets — you believe that the price of the underlying asset will rise by a specified time. With these options, money is made when the price of the underlying asset increases in value.
We call the right to sell a stock a put option, and itвЂ™s exactly the opposite of a call. These are bearish bets that the price of an asset will drop in value.
You purchase options via a contract. Each contract — be it a call or a put option — controls 100 shares.
LetвЂ™s explain each of these options contracts in more detail.
When You Think the Asset Is Going Up in Value — Use a Call Option
Believe it or not, popular e-commerce site Groupon gives us a great analogy for explaining how call options work. You open up your email and find a deal that gets you dinner for two at a super-fancy fixed-price restaurant for $100. This is such a deal — usually, youвЂ™d be looking at a $200 bill.
You buy the coupon for $100, and you must use it before it expires in 60 days. However, within two weeks of purchasing the coupon, the restaurant decides to raise its menu prices, and a dinner for two on the fixed-price menu now costs $225. YouвЂ™ve realized a bit of profit here, since the restaurant is obliged to honor your coupon, for which you spent only $100.
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When you buy a call option for a stock, youвЂ™re essentially doing the same thing. YouвЂ™re buying the right to purchase shares of a company by a certain time in the future for a specific price.
An Example of a Call Option
Say you think that Apple, which is trading around $140 per share, is a great but undervalued stock and that itвЂ™s going to rise within a month, by June 1. You buy a call contract that states you have the right to buy 100 shares of Apple on or before June 1 (the contractвЂ™s expiration date) for $150 (the strike price).
Your instincts about the company are right, and by June 1, positive news has shares of Apple up to $200. At this point, you can exercise your option and receive 100 shares of the company for a steep discount; you would pay only $150 per share. Then you can sell them at the full price for an instant profit of $50 per share (minus the cost of the option and broker fees).
What if you were wrong? Well, if Apple shares actually drop to $120 during the month, you just let your contract expire and lose only the amount you spent to buy the call contract.
One of the advantages of an options contract is that the price to hold the options is much cheaper than the cost of directly owning the 100 shares of Apple in the example above.
When You Think an Asset Is Going Down in Value — Use a Put Option
Put options work the opposite way of call options. Say you think Tesla actually sucks. You think that its stock is going to fall from $300 per share by June 1. You buy a put option that states you have the right to sell 100 shares of Tesla at the $310 strike price by that date.
Your negative instincts were right, and TeslaвЂ™s stock plummets to $250 within the month. However, because of your put contract, you can now buy these $250 shares and sell them each for $310, a profit of $60 per share (minus the cost of the option and broker fees).
Popular Options Trading Strategies
As you already know, there’s much more to options than just buying and selling calls and puts. There are options strategies for making bets (speculating), reducing risk and generating income. Some strategies make a profit when a stock goes up. Some do well when a stock goes down. And some are designed to do best when things stay calm. You can also apply these strategies to the overall stock market, using options on an index such as the S&P 500.
Many strategies have amusing names such as “spreads,” “straddles” and “strangles.” Keep reading and soon you’ll be able to talk about them without snickering or wondering if you just said something inappropriate in mixed company.
#1 Covered Calls
Probably the best-known options strategy is writing (selling) “covered calls” (versus “naked calls” — really). With this strategy, you sell call options on a stock you own. You earn money for being willing to sell that stock at a given strike price. (The strike price, aka “exercise price,” is the price at which the option can be exercised.) When you sell a call option, you usually set the strike price a bit higher than the current price, so the call options you write are “out of the money.” Writing a call is a bet that the stock price won’t go above the strike price before the options expire. In such a case, the money you received from selling the calls is pure profit. If your stock goes down, at least the money you received makes you a little less sad.
Worst-case scenario? The price of the stock does rise above the strike price and you do have to deliver your stock. You then receive a cash payment equal to the call’s strike price times the number of shares. This could be a problem if you didn’t already own the stock, since you would have to buy shares at the market price. This price will often be higher than what you received for the shares.
But in the “covered call” situation you’re ok — you’re “covered” (not naked). You already own the stock you have to deliver, and you keep the option premium.
If you decide you still want to own that stock, you’ll have to buy it again in the open market. The cost will likely be higher than the strike price you received, but you have the strike price plus the money you were paid for selling the calls.
Example of Covered Call Outcomes
Here’s an example. You own 100 shares of XYZ Corp., currently trading at $47. You sell a call option for those shares at a strike price of $50. These options are priced at $3.50 per share, so that’s $350 in your pocket for options on your 100 shares. There are two possible outcomes for this strategy:
Outcome #1: The price of XYZ stays below $50, and the options you sold expire. You keep the $350 option premium and your 100 shares of stock that are worth something less than $5,000.
Outcome #2: The price of XYZ goes above $50, and the options are exercised. You deliver your 100 shares of stock for $5,000 ($50 strike price times 100 shares), and you keep the $350 option premium.
With Outcome #2, if you still want to own the stock you could use your $5,350 to buy another 100 shares. The price would have to go above $53.50 before you would have been better off not writing the covered call options.
A Higher Return Than the S&P 500
Writing covered calls on the S&P 500 index with a strike price roughly 8вЂ“10% above the current value of the index has, over a 30-year period, offered a higher return than just holding the S&P 500 itself. However, writing covered calls isn’t a “win” all of the time. There’s no such thing as a “sure thing” with investing. If your stock or the S&P 500 makes a strong move up in a short period of time, you’d be better off just holding the stock or the index.
#2 Bullish Spreads
Let’s say you’re thinking of buying a stock during the next few months. You want protection against the price going up too much before you jump in. You could just buy call options, but that requires more money up front than you want to spend.
What should you do in Bullish Spreads?
A bullish call spread could be the answer. You buy calls at a chosen strike price. At the same time, you sell the same number of calls at a higher strike price. Both options have the same expiration date. The calls you buy (with the lower strike) will cost more than the ones you sell (with the higher strike), but the money you receive from selling partially offsets the cost of buying.
This “vertical spread” strategy may be appealing if you expect a modest rise in the stock price. Worst-case outcome? The stock goes up by a lot — higher than the strike price of the calls you sold. But you’re ok. You exercise your call options with the lower strike price. Now you own the stock, so you’re in a covered call situation. And you made profit from the difference of the two strike prices. You bought at the lower price, let’s say $45, and sold at the higher price, say $50. So, you made a $500 profit on 100 shares, less the amount you paid for the call spread.
If the stock price goes down, you’ve lost the money you paid for the calls you bought, but that’s reduced by the income from the calls you sold.
#3 Bearish Spread
This is similar to the bull call spread. But in this strategy, you use puts instead of calls. You buy puts at a chosen strike price and sell the same number of puts at a lower strike price, on the same stock, with the same expiration date. As with the bull call spread, the money you receive from selling partly offsets the cost of buying. You might do this if you think a stock is going to decline but don’t want to pay the full price of the puts.
If the stock declines below the first strike level, you deliver shares and receive the strike price, generating a profit. If the stock price goes below the lower strike on the puts you sold, you’ll have to pay that strike price and will receive shares of stock that are now worth less than that. If the stock drops sharply, this can be risky.
Say you’ve owned a stock for a while and it has done well for you. You’re not ready to sell, but you don’t want to lose your gains if the stock takes a tumble. What can you do? Put on a collar. This consists of buying out-of-the-money puts (the strike price is below the current stock price) and selling out-of-the-money calls (the strike is above the current stock price). Buying the puts provides downside protection, while selling calls offsets the cost of buying the put. Note that you don’t even have to own the underlying stock to “wear” this collar.
#5 Straddles and Strangles
Suppose you think a stock (or the overall market — remember those S&P 500 options) is going to be volatile over the next few months, but you’re not sure which direction it will go. In this case, consider a straddle or a strangle. You buy puts and calls, either with the same strike price (a straddle) or different strikes (a strangle). With a strangle, the put’s strike is typically lower than the call’s, and the current stock price is in between those two amounts. It will cost you the price of both the puts and the calls, but if the stock does make a big move, either your calls or your puts will pay off.
Conversely, if you think a stock is likely to trade in a fairly tight range, you could use a short straddle or strangle. You sell (short) both call and put options and pocket the proceeds. With a short strangle, if the stock price stays between the call’s strike and the put’s strike, neither option is exercised, so you simply keep those proceeds.
With a short straddle, you have no “wiggle” room. One of the options you sold will be exercised, and you will incur a loss on that. But you earned money from selling the options in the straddle. Hopefully that amount is more than the loss from the option exercise. As long as the stock doesn’t make a big, sudden move, it will be.
Hopefully you now have a good idea of how you can use options to make money whether a stock goes up or down.
There are strategies out there that are even more complex. These include some that “fly” (butterflies, condors, even an albatross) and some whose names could really make you blush. (How about a “strip straddle” — yup, that’s a real thing.) Before you implement any of these strategies, you may want to practice with one or more option trading simulation platforms (such as TD Ameritrade). And if you come up with a strategy of your own, be sure to give it a name that makes people smile.
(Important note: Before you start trading options, make sure that your broker has cleared you for “take-off.” You’ll need to fill out a special for to receive clearance. Here’s more info about the process.)
8 best CFD trading platforms / brokers
For a second topic in our “trading platforms” series, after Top stock trading apps , let’s look into CFD trading platforms. One of the types of online trading, contract for difference ( CFD ) is a contract that enables one of the parties, seller or buyer, to obtain profit from asset price fluctuation.
8 top CFD trading platforms
“Where do I start?” – is a frequent question from inquisitive minds. CFD trading platforms is the apt option to start, a computer software as a gateway to a trading service, where one can buy/sell financial assets. Such platform typically provides various trading types, including CFDs, for transactions between traders directly, or via intermediary/broker/agent, allowing to trade remotely from anywhere. CFD trading may involve stocks, currencies, commodities, shares, etc., and is always performed in pairs (USD to EUR, Shell to Exxon). We’ve selected seven best CFD trading platforms based on usability, friendliness towards novices, reasonable commissions and other factors.
Account minimum: $200 | Max.leverage 1:30 | Avg.CFD margin: 30%
#1 social trading platform by eToro Group Limited, founded in 2007 in Cyprus (with offices in England and Israel). Positioned as innovative web platform for trading, eToro stands out from other CFD trading platforms due to social trading possibilities, a.k.a. mirror trading or copy trading – meaning that users may simply follow the actions of trusted brokers and do the same investments. This made it quite popular in 140 countries, having reached over 3 million accounts.
- Social trading + investment platform, 2 in 1
- CopyTrader feature – copy trades and deals
- CopyFunds feature – copy markets (asset groups following trading strategies) and copy top trader funds
- Ability to view transactions of any member for the whole period
- Stop loss – set a minimum amount of money on account
- 24/7 market hours
- eToro Economic Calendar – to see events that may impact trades
- Trading Academy – page with webinars, courses, blog
Note, that you can withdraw as little as $50, though a minimum withdrawal fee is $5. There is also a $10 inactivity fee, if you have not logged into account for 12 months. eToro complies with multiple regulations and bodies, takes the issue of cybersecurity seriously and is helpful to customers 24/5. In terms of contracts for difference, check out how CFDs on eToro work . Also, be aware of $25 wit hdrawal fee on every deal.
Pros: Quick account opening Reasonable fees and commissions User-friendly interface, multiple languages
Cons: High non-trading commissions Less trading assets in comparison to other platforms Inactivity fee
Account minimum: $100 | Max.leverage 1:300 | Avg.CFD margin: 3.33%
Plus500UK Ltd, represented in and oriented on UK, European, Asia-Pacific, South African markets, and accordingly regulated by British, Australian, Cyprian authorities. Although not available in Canada and the USA, Plus500 is a highly popular trading platform (over 5M downloads from the Play Store). Account deposit is at $100 minimum for debit/credit cards, $500 for bank transfers. CFDs for trading include stocks, forex, indices, commodities, and even cryptocurrencies. S&P500, Euro/Pound, Euro/Dollar, gold, oil… you got it.
- Negative balance protection (guaranteed stop loss)
- 2-step authentication
- Price and real-time market alerts
- Cryptocurrency CFDs – IOTA, Bitcoin, Litecoin, Ethereum
- Free demo account without limitations
- Economic calendar with relevant and real-time events
- Risk management settings – e.g. limits to close at certain profit/loss, trailing stop
- 24/7 online support
What makes Plus500 one of the most attractive CFD trading platforms is a zero fee (yes, zero) for multiple actions, i.e. deposits, forex quotes, open/close trades, live CFD prices. What users pay is a spread for opening a position (bid). Additional fees may incur for overnight trading, stop order, account inactivity. Also, note that when logging into account on two devices, one of those will be disconnected.
Pros: Keeping customer costs in real bank account Simple workflow, quick sign up online Multiple languages, round-the-clock support
Cons: No MT4 connectivity Inactivity $10 fee after 3 months Numerous customer complaints about scams
Account minimum: $20 | Max.leverage 1:200 | Avg.CFD margin: N/A
Capital.com was founded in 2020 with the idea to launch a trading app standing out of competition. The result was a massive trading platform, utilizing AI (SmartFeed) among many technical tools. SmartFeed technology carefully tracks traders activities and behavior to help identify trends, good deals, etc. In addition to encrypting the user data, Capital partners with RBS and Raiffeisen, one of the biggest banks, to store client funds.
- Markets: 2000 shares, 21 indices, 29 cryptocurrencies, 135 Forex pairs
- No fees for deposits, withdrawals, real-time quotes, opening/closing trades and more
- Web and mobile trading application
- Over 70 technical indicators, plus charts, price alerts, etc.
With zero commission for a variety of trades, Capital.com clearly makes one of the leading CFD platforms currently. It also goes the extra mile in explaining and educating about intricacies of contract-for-difference trading. You’ll find guides on leverage, long and short positions, profiting from rising and falling markets, hedging, etc.
Pros: $20 account minimum fund Advanced AI technology at work 24/7 withdrawal policy
Cons: Unclear average CFD margins High leverage ratio could lead to big loss
Account minimum: $250 | Max.leverage 1:200 | Avg.CFD margin: 5%
A proprietary, and primarily a web platform (with desktop and mobile applications too), supporting MT4, ProRealTime and L2 Dealer. The charts are quite advanced and flexible, e.g. with the option to set alerts on a specific indicator, and there are 22 indicators in total. Minimum deposit for live accounts is $250, while we can use a demo account first, requiring no amount at all. Sum up all these factors and we have IG as another contender for a best Fx and CFD trading platform.
- Access to thousands of 24-hour share CFD markets
- Split charts – view the same positions on multiple timeframes at the same time
- Operational in 16 countries
- Under FTSE 250 regulation
- Automated trading options and “smart settings” (save deals and values)
- Risk protection – to avoid negative equity, partial or full closing of positions
- Cryptocurrency trading – Bitcoin, Ether, Litecoin, Ripple
- Works on Chrome, Safari, Mozilla, Edge, IE (IG recommends Chrome)
On the web, IG is streaming news from Reuters and offers frequent research materials via Economic Calendar. Additionally, there is IG Community portal, where traders can discuss nuances among themselves or with IG staff. The platform allows social trading , a.k.a. mirror trading, however it isn’t an autonomous social trading platform.
Pros: Simple account signup, fast verification Qualitative trading platforms and tools Helpful and reliable customer service
Cons: Not supporting MT5 Social trading only partial Inactivity fee
Account minimum: $0 | Max.leverage 1:500 | Avg.CFD margin: 4%
A global top-tier trading entity with 40+ years on market, IB Group now provides powerful trading software platform, TWS (Trader Workstation). It’s a place where investors can trade stocks, options, futures, bonds and funds on 125 markets within single account. Interactive Brokers is an online trading place with HQ in Connecticut, USA. Products include web portal (IBKR WebTrader), desktop app, mobile platform (IBKR Mobile for iOS and Android devices), IBot, API. There is “zero” minimum deposit policy to start off trading, although no account activity may lead to certain fee.
- Universal account – view/trade multiple assets, trade CFDs in one window
- Reports – including real-time trade alerts, margin information, cost analysis, etc.
- Smart Routing technology to calculate a CFD reference price (the exchange-quote price for a specific share)
- Transparent quotes – IB charges an honest commission on spreads and price movement, without requotes
- FX Trader – with streaming quotes, indicators, volumes, pending trades, etc.
- IBot – a personal helper for quick information on stocks, account balance, etc.
- Portfolio Analyst – reporting and management tool with 200+ benchmarks
- Offline installer of TWS software
Over 60 order types are accessible in TWS, from basic to complex algorithms for CFD trading. Commissions are lower than other platforms offer – depending on the index, starting rates are within 0.005% – 0.01% range. The platform also has risk management and monitoring tools for assets, and offers coherent real-time data for active traders to be able to react quickly.
Pros: Powerful and all-round trading software Excellent for market and portfolio analysis Low fees, transparent commissions
Cons: TWS will be difficult and time-consuming to start with Small or inactive accounts may get maintenance fee Regional restrictions in CFD trading
Account minimum: $250 | Max.leverage 1:10 | Avg.CFD margin: 3.33%
A leading European trading company, X-Trade Brokers, or just XTB, established in Poland in 2002. Beside CFD, FX, ETF, and own xStation 5 platform, it also has access to conventional MT4, and it is available as a web service, mobile app and desktop app. With $250 initial account deposit customers get access to 1,500 global markets. Nice bright design, fast speeds, excellent 24/7 support service, API and all the rest defines XTB as the cutting-edge service for professional traders and brokers.
- XStation 5 for desktop, tablet, mobile (Android) and smartwatch
- Trading calculator feature – to preview potential profits and losses
- Stop loss guarantee / negative balance protection
- Free market comments from brokers in audio format
- Equity screening to discover trading opportunities
- Advanced technical indicators, e.g. Fibonacci Retracement
- Stock CFDs (1,500 equities) and ETF CFDs (60 units)
- Leverage on CFDs up to 1:10
- Live performance stats
- Free mobile alerts
With vast number of investment products, indices, commodities, etc. available to trade or invest in, they seem to have it all, however XTB seems to be lacking in spread betting. Demo or live account, immediately after signing up, you will get a phone call to help and guide along the way.
Lots of functions are simple drag-and-drop, there’s a lot of analytical tools, screeners, heatmaps and indicators. Also, constant news feed and daily technical analysis and expert op-eds. Popular E UR/USD spread as of Q2 2020 was 0.00007 pips. There’s also a round turn commission of 0.16%.
Pros: Free educational materials online Multiple interface languages Customer support via email, chat, phone
Cons: XTB was fined in 2020 for asymmetric price slippage Unavailable in many countries Basic order types only
Account minimum: $1 | Max.leverage 1:50 | Avg.CFD margin: 10%
Founded in 1997, Oanda is one of the best CFD trading platforms both for advance and casual users. It offers trading tools for European, Asian and African countries, Canada and Australia. Oanda is available in web, desktop, mobile versions, as well as provides an API (for purposes of real-time trading, automation, etc.). Demo accounts without any limits, plus educational videos, webinars, Q&A sessions.
- 80 indicators
- Connectivity to MetaTrader4, NinjaTrader, MotiveWave, MultiCharts
- MT4 open order indicator – to analyze market trends
- Historical spreads – min/max/avg spread data for set periods
- Price signals – set price up/down limits, or as simple moving average
- Trading performance portal – visualizations of profits, losses, risk/reward ratio, etc.
- Algo Labs site – for users to create own apps
- FXTrade mobile trading platform (Android, iOS)
There are certain considerations about Oanda as well. Accounts do not have protection against negative balance/slippage, average spreads do not reflect fixed time periods, in the EU the platform operates in a “broker” mode. Average CFD margin is 10% (see margin rules for more).
Pros: Ability to open an account for just $1 Wide array of currency pairs, asset classes API, mobile trading and more sophisticated tools
Cons: Might be difficult for beginners Accounts with no slippage protection No CFDs for cryptocurrencies
Account minimum: $5,000 | Max.leverage 1:100 | Avg.CFD margin: 1%
A Swiss online bank, Dukascopy Bank , provides web and mobile trading services, including CFD, foreign exchange, etc., banking services, technological solutions. It is under the regulation of Swiss supervisory body FINMA . Desktop trading platform, titled JForex 3, contains hundreds of indicators, news feed, historical testing. Through it or MT4 traders can implement automated and algorithmic strategies. Both demo and live accounts, although CFD trading is available only for regular live accounts. The minimum deposit for account is probably the highest among all CFD trading platforms – $5,000.
- Markets: oil, gas, copper, 5 soft commodities, 18 indices, 2 bonds, liquid stock CFDs
- 24 trading hours for most instruments
- Equal prices and trading rights for all clients (marketplace model)
- Funding by credit card, deposits in 23 currencies
- Deposit protection by a bank up to 100,000 CHF
- MetaTrader 4 accounts support, 1:100 default leverage
- Swiss Forex marketplace – SWFX – a proprietary service by Dukascopy
- Fix API – to integrate, get real-time data and notifications, submit orders, etc.
- Help – wiki, tutorials, webinars, seminars
CFD prices are in correlation with SWFX marketplace price technology, and every client may impact a price by own bids and offers. Commissions are clearly defined, yet to calculate average spreads, one has to study daily/monthly/quarterly SWFX performance data. There are also additional account management fees, volume commissions, outgoing transfers fees, withdrawal fees, etc.
Pros: JForex proprietary platform by a real Swiss bank Extensive research and analytic materials Good customer support 24/6
Cons: Large initial deposit High commissions for low deposit traders
|CFD trading platforms: Main features|
|Demo account||Min.deposit||Min.fee||Total pairs||Max.leverage||Mobile app||API|
As a bottom line, we are compelled to say that the choice of CFD platform depends on factors, such as broker expertise level, personal or business investment requirements, user interface preferences, markets and commission rates. That’s why there are more trading platforms beyond our list above, that are popular too. For instance, Poems by Phillip Capital is in demand in Asia-Pacific region, Muslim countries seem to prefer Orex by ADSS Securities. eToro fits well for beginners, while City Index and LCG Trader are favored by skillful investors.
Financial pundits predict further increase of CFD transactions in 2020. CFD has its pros (access to global markets, lower margin rates, reasonable commissions and fees) and cons (high leverage, big risks of losing money), and therefore require a great deal of knowledge, trading experience and persistence.
P.S. Honorable mentions: AMarkets, City Index, LCG Trader, Orex, Poems, SaxoTrader, FxPro.
P.S.#2. You can trade CFD through Metatrader 4, Metatrader 5. Read a comparison of MT4 vs MT5.
What is CFD?
CFD is an intricate financial instrument, which is quite popular in countries like the UK, Austria, Switzerland, France, Germany, Russia, Singapore, Norway, etc., although not allowed in the USA, India. Its has compelling benefits, e.g. being a derivative tool – so no ownership of assets is required; huge leverage rates – allowing to operate with costs much higher than initial deposit; less strict limitations for trading. Overall, there’s a lot to learn if you want to start trading differences.
In trading, a contract for difference (CFD) is an agreement between a seller and a buyer on the asset value difference between the time of opening and closing a position. It offers traders an opportunity to profit from price fluctuations without owning an underlying asset.
How does CFD work?
Consider two positive scenarios to see how contract for difference works.
- Leverage 1:1
- You buy a Tesla CFD contract for $180
- After 2 months , the contract is worth $240
- You close the deal with a profit of $60
- Leverage 1:10
- You buy an AMD CFD contract for $28
- After 4 days , the contract is worth $34
- You close the deal with a profit of $60
Leverage in trading may increase profit substantially, however do not forget it also has the opposite effect – a risk of losing the investment, if forecast is incorrect. In the worst-case scenario, you might even end up with a negative balance.
It is good though, due to competition, most brokers/platforms provide protection against negative balance. We recommend to apply a leverage of 1:10 maximum, as well as always have additional funds on a balance sheet, so that your contract does not close automatically before stock/contract growth.
What is a CFD trading platform?
CFD trading platforms are computer programs such as AMarkets (SaaS model), that serve as a trading platform. They provide access to various trading types, to conduct transactions between traders directly or via an intermediary. CFD trading may involve stocks, currencies, commodities, shares, etc., and is always performed in pairs (USD to EUR, Shell to Exxon).
By far the most popular platforms (a.k.a. brokers) are MetaTrader 4 and MetaTrader 5, check out MT4 vs MT5 comparison by the way. These CFD platforms really have all the necessary functionality, but the list does not end on MetaTrader.
cTrader is a platform for experienced traders, with unconventional tools for trading strategies. With access both to MetaTrader and cTrader, the latter offers customers more favorable terms on fees and commissions.
Some brokers offer personal trading platforms, for example Interactive Brokers with its IB Trader Workstation (TWS). It is designed for active traders and investors who work with several products. It contains all modern algorithms, a library of layouts, modules, assets.
These mentioned CFD broker platforms, along with XTB , Oanda , etc.are among leaders today. Yet, there are dozens of others to explore and choose the most suitable one. Check online tutorials, documentation and reviews for details.
CFD trading strategies
The two most popular trading methods are short- and long-position, and sometimes “intertrading” in-between.
- Long position – purchase amid rising prices on the market. An exchange trading participant buys an asset in anticipation of value growth in the future. With short-term forecasting skills, or monthly/annual forecasts, or through technical analysis, a trader makes profit in the end, even when price fluctuations are insignificant.
- Short position – purchase in a downturn. This strategy is appropriate when, when a trader predicts a decline asset price. Thus, an asset is sold on condition of possible future purchase at the lowest price. If forecast was wrong, and asset price rises, traders would lose an amount equal to deviation between asset value at opening and closing of a transaction. If a forecast turns out to be correct, the bidder makes a profit. Such method makes it possible to bid on the shortest possible intervals, even within a minute.
CFD commissions and fees
Commissions, fees, hidden fees, additional paid services, margins, spreads and more – all this you are going to encounter on trading platforms. Many CFD brokers may offer a choice of appropriate fees for your trading strategy.
Optionally, there may be a guaranteed stop loss (for an additional fee) or other additional services and tools. Account inactivity, in many cases with CFD trading platforms, will be charged too. Therefore, we’d advise to carefully study all fees and commissions before choosing a platform.
Let’s highlight one concrete example of what we may be dealing with. Take XTB “Pro” account, which we chose after consulting with Broker Chooser portal, helping to calculate fees of real CFDs as of 1 week sale. The condition was an asset purchased at $2,000, and 5:1 leverage. At the exit, when buying Apple Stock CFDs the commission is $18.1, when buying Vodafone CFDs – $24.4.
Under “Standard” account, a trader would only pay higher spreads, and no other fees. You can get acquainted in detail with the table of XTB fees and commissions for this particular broker.
How to calculate CFD fees?
There is no single formula for all CFD platforms/brokers, because one may earns on spreads, while another has additional commissions and fees. Many brokers provide their own formulas and even calculators for deducting fees. For example, in AMarkets standard plan no fees, but in Amarkets ECN plan is a 2.5$ commission per 1 lot.
Minimum deposit and withdrawal
In order to start trading CFDs, you first need to open an account with a broker. Typically, you need to place between $0 to $10,000, depending on the broker. In light of competition, the initial deposit has been lowered to $0-250 in most cases.
For deposit, Visa or MasterCard credit card, bank transfer, PayPal, and in some cases cryptocurrency, will do. In general, this process does not differ much from buying a product online, only here you may need to verify your identity.
Withdrawal of funds occurs upon request, often to a credit card or a bank account. The amount, method and timing for withdrawal can also vary from broker to broker, so study their conditions beforehand.
CFD pros & cons
Benefits of CFD trading:
- Higher leverage . Unlike traditional trading, the contract for difference has a higher leverage and is subject to regulation. In some cases, the leverage reaches 1:500 ration, which allows the investor to get more potential profit with less capital, but it is also worth remembering that this could increase the loss. Thus, CFDs are great for a small investor.
- Global market access . Today, all CFD platforms provide access to all major global markets, with round-the-clock activity.
- No shorting rules or borrowing stock . Some markets install rules that prohibit shorting , require traders to borrow the instrument before selling short, or margin requirements for short and long positions. CFD instruments, on the other hand, allow shorting any time without borrowing costs because traders do not own assets.
- No daily trading requirements. Unlike markets requiring a minimum amount of capital for daily trading or limiting daily transactions, CFD market is not bound this way, account holders can conduct day trading as they wish.
- Variety of trading opportunities. Brokers offer CFDs on stocks, indices, currencies and commodity contracts, any of which could be a decent alternative to exchanges.
- Execution without fees. The same types of orders as with traditional trading are offered, including stops, limits and conditional orders, e.g. “One Cancels the Other” and “If Done”. Some CFD platforms offer guaranteed stops that charge a service fee. Brokers earn money through spreads, and many of them do not charge any commissions or fees at all.
- Ability to earn money both via rising or falling prices.
- Weak regulation . CFD industry is not strictly regulated, broker reputation and proficiency is based largely on trust rather than government regulation.
- The risks . CFD trading is volatile and requires close monitoring. There are liquidity and margin risks that need to be maintained. If you cannot cover the cost reduction, a provider may close your position and you will have to cover the loss. Overall, risk of leverage exposes you to greater potential profit, as well as large potential loss. Although stop loss limits are available from many CFD providers, they cannot fully guarantee no loss.
- Spreads and commissions . Spread on entry and exit, basically, eliminates the possibility of profit from small transactions. Spread also reduces winning trades in relation to base price. Some brokers add hidden fees too.
Q: How to trade CFDs?
A: To start trading, you need to determine the market, determine the position size and open a deal, monitor your position and adhere to your exit strategy.
Q: What is CFD leverage/trade leverage?
A: Leverage is the corresponding ratio of trader’s funds to the size of broker’s credit. In other words, leverage is a borrowed capital to increase the potential returns.
Q: Is CFD trading safe?
A: Even with financial literacy and a relevant trading strategy, there is always a risk of losing your capital.
Q: Why is CFD banned in the USA?
A: CFDs are derivatives, they are traded OTC (over-the-counter), meaning they are not traded through regulated exchanges. They were also banned in the USA because the majority of traders were constantly losing on CFDs.
Q: How to buy CFDs?
A: Decide which market you want to trade on, click Buy if you think the price will increase in value, select your trade size and choose how many CFDs you want to trade.
Q: What is a CFD margin?
A: Margin is the amount of money required as a “good deposit” to open a position.
Q: How do CFD brokers make money?
A: The first transparent way in which CFD brokers make money is through spreads quoted on each market. Also brokers/platforms charge a commission in form of percentage on the size of a transaction.
Q: What does CFD pairs mean?
A: Pairs trading is the action of buying one instrument and simultaneously selling another. It is called “pairs trading” because you are, essentially, trading a pair of CFDs.
Q: What is a CFD spread?
A: In CFD trading, a spread is the difference between the purchase price and the selling price quoted for an instrument. The buy price quoted will always be higher than the sell price quoted.
Q: What are the best CFD brokers?
A: You can choose a broker/platform from our list in accordance with your trading strategy, fees and other preferences.
Q: Is CFD same as Forex?
A: No. The main difference between CFD trading and Forex trading is that CFD involves different types of contracts than Fx (indices, energy, and metals, etc.) whereas Forex is pure currency trading.
Q: CFD vs stock trading
A: CFD trading mimics share trading with the exception that in a contract for difference, you actually do not own the asset, unlike company shares.
Q: CFD vs options
A: Options deliver a number of benefits to CFDs and might be a part of risk management. Options have a “real world” value beyond that of the CFD, although they are more complicated. So, for experienced traders in certain situations, options may well represent a better reward-to-risk ratio than CFD trading.
Q: CFD vs ETF
A: As a CFD trading alternative, ETFs are better for those seeking a passive investment. Yet, CFD trading allows to access a bigger range of markets using a broker account only.
Best stock trading apps
Following the expansion of online businesses, people are given an opportunity to try themselves in just anything they are interested in. In case you’ve always wanted to be a stock trader but starting this type of business was too expensive and required a lot of effort, now it’s the right time to start earning with great and easy stock trading apps you will learn about in this article.
Best stock trading apps
With millions of installs and leading positions in Finance category of both app stores (Google Play / App Store), eToro is an online trading platform that fits in a hand and is always with you. With over 2,000 financial instruments, eToro mobile app offers access to the same features as the web portal.
How it works: open an account and trade stocks, CFDs, cryptoassets, indices, ETFs, etc. Aided with real-time data, analytical tools and stopp-loss on account, traders build up their portfolio. You may also find eToro among top CFD platforms to know more.
Cool features: virtual (demo) account with $100K for beginners to practice, insights from experts and community, 1-click trading, offline trading for selected orders.
User tip: When not sure where to start, make use of CopyTrader feature, replicating bids and investments of a specified trader. Also, don’t skip setting a stop-loss, a minimum sum on account, not to lose money.
Business model: free to install, minimum initial deposit $200, withdrawal fee, inactivity fee.
Plus500 is a recognized by its comprehensive trading screen with detailed information about past and current positions of the stock. The app is very rich visually and includes expansive charts. The fees and commissions are affordable and variable so investors of all skill levels should try it out.
How it works: Plus500 is a proprietary platform with a strong focus on technical analysis and stock trading. The app allows the users to multitask within the program; trading in several markets and tracking the real-time quotes.
Cool features: Demo account, Risk Management, a variety of trading assets, E-mail alerts, Mobile alerts, Guaranteed Stop Loss, Available for all mobile OS.
User tip: Integrate all your trades in several financial markets by using the same screen of the Plus500 app.
Business model: €100 minimum deposit for standard funding methods / €500 minimum deposit for bank. €10 Inactivity Fee.
Risk warning: 80.6% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
TD Ameritrade Mobile
Toronto-Dominion Bank’s app is ideal for advanced traders and inclusive simplified features for the beginners and training for investors. The software enables easy external money transactions and can be used on four different platforms.
How it works: Download the TD Ameritrade Mobile app from the store and register an account (in case you haven’t registered on tdameritrade.com). With $0 account minimum, start investing and monitoring the stock market by remaining logged into your application.
Choose the initial investment amount and start earning money by trading. Advanced:
- Retirement Account (Traditional, Roth, or Rollover IRA)
- Education Accounts (Tax-free Coverdell, UGMA/UTMA accounts, 529 Plans)
- Specialty Accounts (Advanced features)
- Managed Portfolios
- Margin Trading
Cool features: Transferring the funds between TD Ameritrade and external accounts, $0 account minimum, taxable brokerage account, in-depth account monitoring, price alerts, charts with indicators, customization of screens and lists, news and research, back testing, earning calendars.
User tip: You can track the real-time quotes on your Apple Watch, without using your smartphone. TD Ameritrade has four different platforms; Web Platform, Trade Architect, Thinkorswim, and TD Ameritrade Mobile App. Although you can use all of them, you must know the difference.
Business model: $0 minimum stock.
Free, basic, simple to use and of the best stock trading apps. Apart from the standard plans, the app offers premium memberships for golden features. The absence of commissions makes it extremely suitable for new investors.
How it works: After signing up and making a deposit, you can search for a specific firm within the app search bar and, similarly to all the trading platforms, monitor the flux of the company’s revenues and invest accordingly.
Cool features: No minimum investment, no maintenance fee, no commissions. Scheduled deposits, company watch list, day-trade tracking, advanced order support. Newly added feature Robinhood Instant allows you to access the deposits (under $1000) instantly instead of typically waiting for three business days.
User tip: Deposit your funds immediately so you can catch a great deal once it appears. Have patience. If you see a growing potential of your stock, do not rush to sell it and lose money before even gaining it.
- Robinhood Gold (Large amount of instant deposit, after-hours trading, credit line)
- Cryptocurrency Trading (Bitcoin, Litecoin, Dogecoin, etc)
Business model: Free app, no commissions. Although it may seem too good to be true, Robinhood actually offers an opportunity to earn without taking any commissions from you and that’s the key component of the app’s official advertisement campaigns.
Stock trade app suitable for skilled traders with large investments and profitability. The app is available on all mobile OS systems and a Web platform. It offers powerful monitoring and analyzing tools.
How it works: Investors can buy and sell stock, options, future, bonds, mutual funds, forex, and trade online without interacting with the broker directly. To start trading, you need to invest the minimum of $500 as a deposit.
Cool features: Margin Analyzer tool, Margin Calculator tool, both updated frequently. Advanced customer service, 24×5 trading on most active ETFs. Real-time news and quotes, bar code scanner, comparison and performance charts, the customization of watch lists, voice recognition system.
User tip: Click the Complete View page to see all your assets and E*Trade account on one screen. It will also show you the investments overview. Analyze the data as fondly as you need and extract all the relevant information.
Business model: $500 minimum investment. In order to buy the stocks, you must pay $6.95. The price decreases to $4.95 in case you make over 30 trades per quarter. Other plans are brokerage accounts, retirement accounts, managed portfolios, small business retirement accounts. The app is known as the one with the highest fees in comparison to their rivals.
Low-commission stock trading app. Users can customize most aspects of the software, including its appearance and functionality. Upon registration, you can adapt your features depending on your skill level.
How it works: Upon registration, you must complete a questionnaire that will let this stock trading app determine your goals and investment methodology. Fidelity app provides you with ETFs and mutual funds you can use for your investments.
Cool features: Personalized feed, account review, and management, customizable alerts, adjusted tax schedule, ability to pay bills automatically, deposit money to the Roth or Traditional IRA. By connecting Fidelity to Echo, the voice response device by Amazon, you can get any answer about the stock changes immediately.
User tip: Find Feed Preferences and adjust your feed according to your needs. Use the Learning Center and select the financial area of your interest. Keep learning and listening to qualified sessions that will expand your trading knowledge.
Business model: $4.95 registration. Over 90 commission marked as “Free” ETFs that aren’t exactly free as you must pay the expense ratio between 0.10% and 0.50% of the total balance you invested.
SigFig is a stock trading app with a well-organized asset management and simplified, easy-to-track portfolio. Due to a moderately high account minimum in comparison with other low-cost apps, this program is more suitable for experienced traders.
How it works: SigFig is a specific platform as it utilizes third-party accounts of the users who must be previously registered on TD Ameritrade, Fidelity or Charles Schwab. It monitors and enhances the portfolio of the user, balances the investments and reduces the fees.
Cool Features: Add-on app, third-party account sync, free adviser, advanced Portfolio Tracker. SigFig automatically reinvests your dividends; automatically rebalances the funds on all the accounts for free.
User tip: You cannot manage your credit card on SigFig. In case you want to associate different financial accounts apart from the ones registered at its partners’ platforms (TD Ameritrade, Fidelity or Charles Schwab), you will not be allowed to.
Business model: 2,000 account minimum. Manage your first $10,000 for free. After passing the limit of $10,000, the annual management fee is 0,25%. The fee for Diversified Income Portfolio is 0.50%.
Undemanding app for new, inexperienced investors seeking for the best way to start their trading career. Each user has the ability to own a retirement and standard account at the same time, on the same platform. Stash is very popular worldwide because it offers a range of flexible investing options.
How it works: Similarly to SigFig, Stash isn’t a direct manager of the registered accounts. However, in this case, you can link it to your bank account; the primary purpose of Stash as a trade stock app is to teach you how to build your ETF portfolio.
Cool features: Stash Coach; Smart-Save (saving the minimum off your daily purchases; REITs (Real estate investment trusts) feature invests minimal quantities in real estate, uniting the users with the same interests and purchasing a shared property.
User tip: Instead of using several apps to monitor and manage your finances, you can open a retirement account on Stash at the same time as operating your regular account.
Business model: Free registration/$5 minimum investment. $1 monthly fee for accounts under $5,000, 0,25% annual fee for accounts over $5,000. Stash Retire ($15 account minimum), custodial accounts (Available for users under the age of 18, registered by the custodian).
This is an extremely rare stock trading app with the ability to provide small purchases with the gift cards. The whole company is based on fractional shares and does not require large investments. Stockpile is primarily created for new investors, including children.
How it works: Stockpile offers “fractional shares”, minimized stocks (instead of buying a whole share, user can buy 0.10 of it) and enables the users to invest in household-name companies. To complete the process, user must purchase a gift card and exchange it for the stock.
Cool features: Gift bundles, wish list, redeem for retail, credit card funding, physical gift cards validity. iOS and Android Stockpile app has all the features of the Web Stockpile version.
User tip: This stock trading app developed an expert learning system. Access its affordable education courses and learn everything about investing. E-gifts cost less than physical cards.
Business model: 0% minimum investment. Taxable and Custodial accounts, $0.99 fee per trade, $2.99 fee for the first gift card stock, $0.99 fee for every extra stock.
Schwab Mobile (Charles Schwab) is one of the leading stock trading apps, created for investors of all skill levels. The app design is very simple, making it easy for first-time users. It also includes a long list of advanced features for experienced investors, making it appropriate for every trader.
How it works: Schwab has over 4,000 mutual funds and 250 ETFs, both are transaction and commission free. The app has an exceptional industry research and is marked as highly efficient.
Cool features: Advanced industry research, available on Web and Mobile platforms, custom layouts, news and analysis, watch list, real-time quotes, association with Apple Pay.
User tip: Stick to funds found on the Schwab’s no-transaction-fee list. In case you want one that you cannot find on the mentioned list, you will need to pay $76 for it.
Business model: 0% service fee / $1,000 account minimum. $4,95 trade commission, $100 gift for the first-time users, $76 fee for the transaction fund off the list.
Acorns is a user-friendly investment app associated with the bank account of the user. It automatically saves minor percentage off your daily credit/debit card purchases in your portfolio. Due to the simplicity and basic features, it is recommended for the first-time investors.
How it works: With the “round-up” system, Acorns monitors your bank account and keeps the minor changes from your purchase until saving $5 into your investment portfolio; then, it invests automatically to a certain portfolio you previously chose.
Cool features: Quick deposit options, no minimum investments, “Potential” tab that allows the user to see the growing potential, round-up multiplier.
User tip: By recommending the app, you receive $5 per every registered person. At the beginning, do not constantly check the app and monitor every spent dollar. Keep purchasing with your linked credit card/s and get surprised by the amount Acorns collected for you.
Business model: $1/month for users with the total balance under $5.000. 0.25%/year for users with the total balance equal to and over $5.000. The better the portfolio, the less affected you will be by the fees.
If you are an investor seeking automated investing and moderately low fees, WealthFront is surely worth a try. The app has an integrated tool that creates the best strategy to help you achieve a certain goal. Although you can create a diversified portfolio, WealthFront does not support fractional shares.
How it works: After registering, setting your goals and risk assessment, Wealthfront classifies the money you invested into ETFs (exchange-traded funds) and acts as your expert financial adviser.
Cool features: Portfolio Review, Tax Location, Index Funds, Automatic re-balancing, Smart Beta, Risk Parity. Path – saving system helps you set the goals and save efficiently towards achieving them.
User tip: In case you need advice and answers to some questions you cannot find in WealthFront’s FAQ, visit the official Web blog of the company where you can find many interesting, educational posts and tips.
Business model: Free registration / $500 account minimum. $250 minimum withdrawal, %0,25 annual fee for accounts with total balance over $5,000. Portfolio Line of Credit for accounts with total balance equal to or over $100,000.
Extremely popular Indian app for users of all skill levels. It is great for first starters as it offers a no-fee first year upon registration. 5Paisa is a low-cost stock trading app with robo-advisory and online share market, including most features the leading financial apps provide.
How it works: Standard stock trading apps where you need to send an application and wait for a few hours until getting approved. Afterward, you can invest in stock of your preferences and use integrated tools of 5Paisa to monitor all your finances.
Cool features: Demat Account, Immediate transfer of the funds, Quick Order, Auto-Investor, real-time quotes, synced watch list, exceptional charting.
User tip: Do not rush with big investments in small-sized and middle-sized companies even when the offer seems very attractive. Do your research and if the firm actually seems stable, invest. If not, it is better to prevent a failure than deal with consequences.
Business model: First free year / free mutual fund account. Annual $400 ($5,80) membership / 18% GST for individual users. Annual $1,000 ($15) membership / 18% GST for non-individual users. $10 ($0.15) per trade.
Another globally recognized app with enormous trade possibilities for active traders, Trading 212 merges with all the major markets. The system emphases educational programs and apart from the mobile platform, you can access it from the web as well.
How it works: As a new user, you can try a demo account that will help you learn about this stock trading app and get familiar with it. Trading212 uses a segregated tier-1 bank account for all the money of their users.
Cool features: User-friendly app, Content-rich educational program, Automated Trading, Web and Mobile Platform, Trading Signals, Market Analysis, Chart Monitoring, One-click Execution.
User tip: After winning once or repeatedly, do not start increasing the size of your trade rapidly. Users usually have this reaction and invest all their gainings, thinking they will keep winning and eventually they lose most of it. Balanced investment is the key of the success.
Business model: Minimum deposit $150 (€100, £100). 1:200 Maximum Leverage, monthly reward of 10 commission-free deals. After the spent 10 commissions, each commission varies from 1.95 ($, €, £) + 0.05% to 1.95 + 0.08%.
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