What Are Single-Stock CFDs?

Jargon and technical terminology that come with CFD trading often scare new traders. This seemingly confusing lingo is actually not that difficult to understand—a perfect example of this is the term single-stock CFDs.

Single-Stock CFD Trading Explained

CFDs are derivative financial products that allow you to trade with the price change of an instrument without requiring you to own it physically and can be made for many instruments classes, including the price of shares or stocks, commodities, and indices.

Single-stock CFDs are simply contracts for differences that are based on a single stock, rather than an index or basket of stocks. Single-stock CFDs are primarily used for two main purposes: price speculation and hedging.

Speculation

The majority of CFD traders use CFDs for speculation, i.e., they take a view on the price direction of an instrument and then open a trade accordingly.

Let's say you want to trade Apple Inc. (AAPL) CFD. If you believe that the value of AAPL CFD is going to increase, your goal would be to open a long position and buy AAPL CFD.

On the other hand, if you believe that the value of AAPL CFD is going to decrease, your goal would be to open a short position by selling AAPL CFD. Once you are satisfied with the profits, you can close the position and earn a potential profit on the price difference.

Hedging

Hedging is a risk management strategy where you take an offsetting position in an instrument to protect yourself from downside price movements.

Let's say that you owned 100 CFD shares of AAPL stock. Given that the stock market is generally volatile, you might be worried about a potential decrease in the value of the price of your AAPL shares.

To hedge this risk, you could open a short position on AAPL CFDs. So, if the value of AAPL shares decreases, your long position would offset some of the losses from your short position. Still, most experts don't recommend holding hedged positions for too long, as they could drastically decrease your potential profits.

Single-stock CFD trading has many benefits, and mastering it could be a potentially profitable endeavor—however, be sure to consider your trading goals and risk tolerance before getting started with single-stock CFDs.

» Ready to start trading single-stock CFDs? Learn more about opening an account with Fortrade