Generating 30% returns per year is a great accomplishment for any stock market investor and with a sensible plan of attack it might be possible for you as well.
At the outset it is important to understand the vital relationship between risk and reward and as many people would be aware, if you want to chase the higher rewards then you need to be willing to risk some capital.
Now some stock market investors can get lucky and achieve some amazing returns but what we will be talking about here are systematic ways to increase your stock market returns using a Contract for Difference or CFD for short.
November 2007 saw the Stock Markets worldwide head south for the first time in a long time and since then the returns from stock market investors have been terrible. January 2008 saw the Australian Stock Market (ASX) fall so fast you would have been forgiven for thinking you were on a wild roller coaster ride at Dreamworld on the Gold Coast, only this time you weren't strapped in!
Successful stock market results start with protecting your precious capital whilst developing a winning system that fits in with your personal investment profile and this basic first step can take up to 6-12 months to achieve.
Ideally you want to be building a stock market strategy that achieves 10% return per annum with no leverage before jumping on board with your favorite CFD broker. Once you are confident in your trading system you can begin to introduce leverage to the account to maximise your stock market opportunities.
CFD trading allows you to leverage your money and put it to better use compared to traditional stock market investing. For example if you wanted to take a $ 10,000 position in a blue chip company you may only need 5% ($ 500) up front in order to control $ 10,000 worth of that blue chip company. This leverage enables you to get your money working much harder for you without any extra effort on your behalf. Sounds great does it.
So once you have your stock market system generating 10% return per annum, achieving 30% returns with CFD trading won't be very difficult. You see if you leverage your account 3 times then in effect you will be making 3 times 10% per year or 30% per annum.
Let's have a closer look at the numbers. If you had $ 10,000 cash in your CFD trading account and you traded at 3 times leverage then you would be accessing $ 30,000 in total trading positions. Perhaps 6 parcels of shares at $ 5,000 for $ 30,000 in total.
Using your 10% stock market system with $ 30,000 means you should be returning $ 3,000 at the end of the year. Now if you consider you only have $ 10,000 cash in your account, as described above, then you have just made a 30% return cash on cash.
Most importantly, CFD trading with leverage means you are exposing yourself to 3 times the risk in the example used above so your drawdowns in theory will be 3 times the size of your unleveraged drawdowns.