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 passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

Share this

Subscribe to our weekly
newsletter and stay updated!

Receive up to S$120*
when you open a ProsperUs Account today
Find Out More