Are you interested in trading stocks with leverage? Then you are not alone. This type of trading has become more and more popular in recent times as the leverage effect can increase your trading profit significantly if you trade in the right direction. The easiest way to speculate on the U.K. and foreign stocks with leverage is through an instrument called CFD (Contract for Difference). A CFD is a derivative instrument that reflects the price movements of the underlying asset, in this case, a stock price, without you having to search for the actual stock.
Advantages of CFD when you want to trade shares with leverage
– CFD brokers give you as a non-professional trader up to 5 times leverage directly
– Trading with CFD takes place without brokerage fees. Instead, the CFD broker earns on the so-called spread and interest when holding the position overnight
– With CFDs, you trade with all popular U.K. shares (Ericsson, Investor, SKF etc.) and of course foreign shares such as Amazon, Netflix and Tesla to approach some
– With CFDs you can also blank shares, that is, buy a short position and earn if the stock declines in value
Ready to start trading stocks with leverage?
We recommend the following CFD brokers for trading in U.K. shares:
24option.com- Winner of our broker test 2020 – Large range of the Global Stocks – Trade quickly with BankID and Swish – Click here to read more
Plus500.com – Large selection, the platform in the U.K. and AI trading algorithm – Click here to read more
To exemplify how trading shares with leverage is different from ordinary stock trading, we have put together an example of trade where Trader1 and Trader2 want to buy Ericsson shares. Then we compare the outcome CFD versus standard stock trading.
Ericsson trading with CFD
Trader1 believes that Ericsson’s share price will rise and wants to invest USD 10,000. The leverage for Ericsson is 1: 5. This means that Trader1 can buy CFDs in Ericsson for USD 50,000. An Ericsson CFD costs 85 USD, which means that Trader1 can buy a maximum of 1851 CFDs (85 x 588 = 49 980). The share price is developing positively and the CFDs that Trader1 bought increase in value by 20% to USD 89.25. Trader1′ CFD holding is now worth USD 52,479 (1.05 x 588 x 85). This results in a profit of USD 2,499 (52,479 – 49,980).
Ericsson trading with regular network makers such as Avanza or the Nordnet
Ericsson share costs USD 85. Trader2 has USD 10,000 in his online broker account and chooses to buy shares for his entire capital, which corresponds to 117 shares (10,000 / 85 = 117.65). The share price rises by 5% to USD 89.25, and Trader2 chooses to sell his entire holding. He has then made a profit of 442 USD (10 442 – 10 0000).
Comparison of results when Trader2 chose to trade shares with leverage
Since Trader1 chose to trade CFDs in Ericsson and use the leverage, he made a profit of USD 2,499. Trader2, on the other hand, decided to buy Ericsson shares from a regular online broker and only made a profit of USD 442. Even though both Trader1 and Trader2 invested the same capital (10,000), Trader1 ‘profit was five times greater than Trader2’. This is thanks to the fact that he traded in CFDs and used to trade shares with leverage.
Leverage explained in more detail.
One of the advantages of trading with CFD (contract for difference) is that you can quickly and easily invest in, e.g. stocks and stock indices with leverage (leverage in English). Of course, there is no need to use the leverage offered, but many professional traders choose to trade in CFDs to increase the leverage effect and thus, their investment opportunities. The leverage effect means that you, as a trader if you want, can increase the potential return from an investment. Therefore, you are not forced to invest all your capital and can instead invest part of it in other assets, which will result in a more diversified investment portfolio.
The amount of leverage you will be able to trade with will depend on the underlying derivative for which you want to speculate. Leverage is expressed as a ratio, such as a ratio of 1: 2, 1: 5, and so on. The standard leverage for CDF trading in shares is 1: 5, which means that USD 1,000 in invested capital gives you USD 5,000 to invest with. The leverage provided for trading in CFDs in the Index, on the other hand, is as much as 1:20, i.e. an investment capital of USD 20,000 is achieved if you have initial money of only USD 1,000.
Let us show this through an example with CFDs for where you can trade stocks with leverage. Let’s say you deposit 1000 USD. The leverage for shares is 1: 5, which means that you have the opportunity to trade CFDs in shares for five times invested capital, i.e. 5,000 USD (5 X 1000 USD). If the price rises by 20%, the holding has increased by 1,000 to 6,000. If you choose to buy Index instead, the same logic applies but instead of 10 times the capital, you can, if you want, use a leverage of 20 times the invested capital. For simplicity, you deposit 1000 USD to your trading account with a CFD broker. You believe that the NASDAQ index will fall during the day, so you want to position yourself in a sell CFD for the Index in question. Since the leverage for the Index is 1:20, you can, if you wish, place yourself in CFDs: for NASDAQ for USD 20,000 (20 X 1000). The NASDAQ index is declining, and your CFDs have increased in value by 20% to USD 180,000.
By utilizing the leverage effect, you can thus gain exposure to the same number of shares and indices without paying more than a fraction of the entire purchase price. Hence, you have more flexibility, as you do not have to unlock all your investment capital at once.
We hope that our article on trading stocks with leverage has given you the information you needed. The next natural step is to take a look at one of the CFD brokers we can recommend to take part in some of their training materials to read more about how you can trade cards in decline:
Avatrade.com – Winner of our broker test 2020 – Large range of the U.K. and American shares – Trade quickly with BankID and Swish – Click here to read more.
Markets.com – Large selection, the platform in the U.K. and AI trading algorithm – Click here to read more