A CFD (contract for difference) is a contract between a “buyer” and a “seller” certifying that the seller will pay the buyer the difference between the price at time of purchase and the price at time of sale. In other words, buying a CFD allows the “buyer” to profit (or lose) from the difference in stock price without actually buying the stock itself.
Liquidity is a Key Advantage of CFD Trading
A CFD day trade is executed in exactly the same way as a stock trade. In fact, if your broker did not expressly state whether you were day trading stocks or CFDs, you probably wouldn’t even sense the difference. And just like with stock trading, there are various courses that can teach you how to day trade CFDs.
So what is the advantage of CFD day trading over stock trading? In a word: liquidity, the degree to which stocks can be quickly bought or sold without affecting the price. When you purchase stocks through the stock exchange, you buy them from one or more individuals interested in selling them at the exact same time you’ve decided to buy. But what if there aren’t enough willing sellers? When liquidity is low, a buyer may be unable to purchase the required amount of stock at the desired price. In that case, the buyer may be tempted to “chase the stock,” which often exacts a toll in both money and health.
In contrast, when you buy a CFD, you’re not buying stock at the exchange. Instead, you’re buying a contract from your broker. The advantage of this method is that your broker can allow you to buy or sell any quantity without linking it to stock exchange liquidity.
Think of it this way: let’s say you want to buy 1,000 shares, but sellers are currently offering only 100. If you are buying your shares in the stock exchange, you will have to wait for additional sellers or, possibly, pay a higher price for additional stock. When you trade in CFDs, you are not limited by quantity. Therefore, the instant you hit the Buy button, you receive the full amount you want, even if that supply of shares is not currently available in the stock exchange. Similarly, when you wish to sell 1,000 shares, you will not have to wait for buyers to take the full quantity. Instead, you sell simply by hitting the Sell button. This is a huge advantage.
Additional Advantages of CFD Trading
Here are several other advantages of trading CFDs:
- No Slippage – Due to unlimited liquidity of contracts, CFD execution price has no slippage. This means your execution will be much better.
Fast execution– Buy and sell orders of regular stock go through a long process in which the order is sent to the broker, who sends it to the stock exchange, where it is executed and sent back to the broker. CFD live trading is between you and your broker alone, making execution super-fast.
- No limit on shorts – In the stock market, some stocks carry limits on shorts. That’s not true for CFDs. Nor is there any uptick limit, which, in the real market, limits the broker’s ability to execute shorts unless the stock rises by 1 cent.
- High level margin – CFD brokers are not limited to the usual scope of leverage on stock and, therefore, can lend you margin up to 20:1.
Rules Limit CFD Trading in the United States
If your broker allows you to choose between stock trading or CFD live trading, choose CFD without a moment’s hesitation! CFD day trading is legal, accepted, and supervised by the regulatory authorities in most countries in the world except the United States. If you live outside of the United States, you may prefer to open a CFD live day trading account after confirming that your broker offers real market spreads, reasonable commissions, and an ample selection of stocks. Our preferred EU broker is www.colmex.com. If you live in the United States, the only way to trade in CFDs is by joining a group of “proprietary traders” (operating outside of the United States) that may be looking for U.S. traders to broaden its live day trading base and trade the proprietary company’s account.