Trading CFDs: Forget The Dividend, Focus On The Market

Trading via CFDs is probably the best way to invest in expensive stocks like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) and Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), among others. This is primarily due to the high leverage offered by CFD brokers which in most cases allows traders to gain access to 20x their current investment capital.

In the traditional style of investing in shares, with one share of Apple going for about $100, a $1,000 investment will only get you about ten shares of the stock. However, with CFDs and a leverage of 20:1, you could easily buy 200 shares of Apple. That’s one of the biggest benefits of trading shares via CFDs.

Another compelling feature about trading in CFDs is the fact that traders can trade them online via various platforms including mobile devices. This means that you can easily trade shares of different stocks from different markets online without having to sign up via a stock exchange based broker. As an example of such a platform see AvaTrade’s  online stock buying conditions where you can buy CFD’s on blue chip stocks via their AVATrader or Metatrader 4 platforms.

CFD day trading and dividends

Some traders still remain puzzled by the issue of dividends in CFDs due to the fact that traders do not actually own the underlying stock. With CFDs, traders simply bet on the potential difference in pricing over a given period based on the current trading price.

Now, when trading in stock CFDs, traders who hold long positions before the stock goes Ex-dividend are entitled to receive the dividend paid per share. On the other hand, those holding short positions have to pay for the dividends. As such, while those holding long positions have their accounts credited with the amount equivalent to the dividend received their counterparts have their accounts debited with the same amount.

However, those who are credited with dividends also have their accounts debited with interest on the amount received whereas, those paying for dividends are credited with interest on dividends paid. As such, it all balances out in the end.

Regardless of this seemingly indifferent aspect of dividends and CFDs, investing via CFDs continues to grow in popularity especially in Europe with France amongst countries witnessing the fastest growth rates. However, this method of trading still remains banned in the US. As for now, Americans continue to rely on the exchange-based method of stock trading where dividend payments are based upon an investor’s ownership in the company.

From a stock price perspective, the price of the stock falls by the same amount issued as dividend per share which means that short position holders benefit from capital gains whereas long position holders experience a decline in the value of their holdings.  For instance, if a stock is trading at $30 per share and the company issues a dividend of $0.50 per share, the stock price will fall to $29.50 per share once the stock goes ex-dividend.

Again, this means that unless you are focused on a dividend stripping strategy, the whole issue of dividend payments in CFDs has little impact on your investments as compared to the gains/losses related to market movements.

Therefore, when it comes to making profits in CFDs, it all depends on how good you are at predicting the bull-bear scenarios in a trending market.

Due to the high level of leverage provided and the ability to engage in margin trading, a slight increase in the stock price could lead to massive gains for traders holding long positions and a reverse to those holding short positions. This gain could be ten to twenty times the change experienced due to dividend payments or receipts.

This is why trading in CFDs is considered to have high-risk of financial loss.  Nonetheless, with the right trading experience or guidance, trading stocks via CFDs can result in massive amounts of gains.

Generally, all investments attract a fair amount of risk. Taking a risk is what results in high returns and as the saying goes, “the higher the risk, and the higher the return.” It all depends on individual trader’s appetite for it.

Conclusion

CFDs offer investors an easier way to day-trade stocks. With traditional exchange-based trading, it takes up to three days to settle a stock transaction, whereas, with CFDs, everything is instant. You can buy and sell a stock CFD within minutes, and then transfer the difference to your equity account.

In addition, stocks like Google, Apple, or Warren Buffett’s Berkshire Hathaway can be easily traded with limited access to capital thanks to the massive leverage provided by various online brokers.