It’s important for blue chip enthusiasts to understand that it’s possible to buy and sell shares via contracts for difference (CFDs) rather than the traditional way of using a broker to buy shares and hold them for long-term appreciation. How does this work? It’s done by trading CFDs on a particular blue-chip stock or a basket of stocks and then waiting for the prices to go up or down. Traders can go long or short when they utilize CFDs, which is not so easy to do when working through a regular broker, paying commission, and hoping for an increase in value.
Pros and Cons of CFDs Over Traditional OTC Trading
There are positive and negative aspects to trading reputable shares via the CFD method rather than the more traditional way, through a broker who allows over the counter (OTC) orders. On the plus side for CFDs, the participant does not have to meet any financial or legal requirements to make buys or to sell. Nor are there any restrictions on shorting the securities. That means people can take advantage of falling or rising markets; it doesn’t matter. All you’re doing is predicting the price move, not waiting for it to go up.
With contracts for difference, you don’t need to apply for and wait for approval to do OTC deals. In the traditional marketplace, as with a standard brokerage company, you have to get approval to trade OTC stocks because they are not listed on the major exchanges. Those are the key advantages of using contracts for difference. So, in terms of margin requirements, approval to trade any company’s shares, and to sell short or long at your discretion, the CFD approach comes with several unique benefits. It’s up to each person to decide on what strategy makes sense in the long run.
The disadvantages include the fact that because the leverage amounts are much higher with contracts, as opposed to traditional brokerages, you stand to magnify the gains and the losses, and it is possible to lose or gain more funds that are in your original account. However, there is a way around this disadvantage and many people use it to limit the downside. When placing any order with a CFD, just remember to use a specific stop-loss provision. That way, losses are, by definition, limited to the extent you want them to be.
Opening an Account
Anyone contemplating the use of CFDs needs to understand the importance of working with a highly reputable broker and platform. For example, for traders who use a reference like Friedberg & AvaTrade partnership, it’s possible to set stop-losses on every order, learn about the securities before purchasing anything, and to find out about all the different ways to buy and sell securities as a part-time, amateur, or even a full-time trader. Furthermore, if you want to take part in this exciting kind of activity, remember to check that any platform you deal with has passed all the regulatory approval requirements for security. It’s also imperative that any platform, website, or firm you use offers advanced technology so you can study charts and do your own analysis for any company shares that interest you.
Why Blue Chips?
Millions of market enthusiasts prefer to only purchase and sell shares of the world’s most well-established corporations. There are two distinct advantages to this approach. First, it’s relatively simple to do in-depth research on large entities, while it’s often impossible to find information about smaller, newer companies that have just come into existence.
Second, older, established businesses tend to enjoy lower price volatility with respect to their share values. Volatility can be a real fear for you if you prefer to use contracts for difference because of the leverage factor. Whenever a person has a highly leveraged asset, even a small price change can make a huge difference in the final profit or loss amount. Blue chip stocks have more of a tendency to move within a set price range from day to day, thus making the shareholder’s job easier.
The Best of Both Worlds
Using a platform that allows you to participate in the securities marketplace without having to go through a bunch of red tape for margin approval, OTC transaction approval, and permission to sell short means a much easier way to potentially earn significant profits on a regular basis. But what about dividends? The good news is that both traditional and CFD trading participants have access to dividends that are paid on well-established shares. The way most brokerages are set up, you can opt to have the value of the dividend added to your account balance or to receive it in a number of other ways.