Understanding CFDs for Beginners: Choosing the Right Shares to Trade

July 10, 2023

Choosing the right share or stock to trade is critical in Contract for Differences (CFD) trading.

Picking the right shares requires careful research and a solid understanding of both the company and the broader market conditions.

Below are some strategies to help you identify the most promising shares for CFD trading.

1. Conduct fundamental analysis

Fundamental analysis involves examining a company’s financial health and performance to estimate its intrinsic value.

For example, let’s say you’re considering trading a CFD based on the shares of Microsoft Corporation (NASDAQ: MSFT).

You might look at the company’s revenue growth over the past few years, debt levels, and return on equity, among other factors.

If Microsoft has shown steady growth and has a strong balance sheet, it could be a good candidate for CFD trading.

2. Perform technical analysis

Technical analysis involves studying statistical trends based on historical trading activity.

For instance, if Apple Inc (NASDAQ: AAPL) has reached a new high recently and surpassed the US$3 trillion market cap.

This could point to an uptrend for Apple. Technical analysts might consider this a positive sign and decide to go long on a CFD based on Apple’s shares.

3. Monitor news and events

News and events at a company and industry level can significantly impact share prices.

For example, Tesla Inc (NASDAQ: TSLA), the world’s leading electric vehicle (EV) manufacturer, set a new sales records in the second quarter of 2023 and delivered 466,140 cars globally.

This kind of news could significantly drive up its share price, which is what happened as Tesla shares gained 7% after the announcement.

Trading a CFD based on Tesla’s shares could be an opportunity to capitalise on this anticipated price movement.

4. Consider liquidity

Liquidity refers to how easily a share can be bought or sold without causing a significant price movement.

Highly liquid shares are generally preferred because they can be traded easily, and their price is less likely to be manipulated.

Large-cap stocks like those from Microsoft, Apple and Tesla tend to have high liquidity due to their large volume of trading activity.

5. Evaluate volatility

Volatility refers to the degree of variation in a share’s price over a certain period.

For example, shares of Tesla and some of the tech stocks have been quite volatile over the last year amid the rising interest rate environment and concerns over the impact on their businesses.

While most of the tech stocks’ share prices, including Tesla, saw a sharp decline in 2022, we have seen a sharp rebound and upward swing during the first six months of 2023.

Such shares could present opportunities for high returns but also carry significant risk.

6. Understand the company and industry

Understanding the company you’re investing in, and the industry it operates in, can give you an edge.

For example, if you’re considering trading a CFD based on Apple’s shares, understanding the dynamics of the tech industry, its positioning, and its potential growth drivers can be beneficial.

Risk management tools vital for CFD trading

While these strategies can guide you towards promising shares for CFD trading, there are no guarantees in trading.

Always use risk management tools, such as stop loss and take profit orders, to limit potential losses, and consider seeking advice from financial professionals.

Remember, CFD trading involves high risk and is not suitable for everyone.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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