8 Advantages of CFD Trading
A Contract for Difference (CFD) is a financial instrument that allows traders to speculate on the price movements of various assets without owning the underlying asset. CFDs also provide access to a wide range of markets, including stocks, indices, commodities, currencies, and cryptocurrencies, offering ample diversification opportunities.
Trading CFDs offers following key benefits:
(1) Access to global markets on a single platform
You can process transactions for almost all types of investments, such as FOREX, futures, and indices, through an account on various CFD trading platforms, without needing to open different accounts for different financial products.
Check out: Types of CFD contracts
(2) Ability to operate in both directions of the market
One of the main features of CFDs is their flexibility. Unlike traditional investments, CFD contracts usually do not have an expiration date, allowing you to hold positions for as long as you want. Some markets have rules that prohibit short selling, require the trader to borrow the instrument before short selling, or have different margin requirements for short and long positions. CFD instruments can be short sold at any time without borrowing costs because the trader does not own the underlying asset.
As CFD trading consists of an agreement to exchange the difference between the opening price and the closing price of your position, it is more flexible than other forms of trading. This allows you to trade in markets that are both bearish and bullish.
Another advantage of CFDs is the ability to take long or short positions on an asset. This means that you can potentially benefit from both upward and downward price movements, depending on your market forecasts. You trade at the buying price if you think the market price will rise, and at the selling price if you think the price will fall.
(3) Trade with leverage
In more traditional forms of investment, traders need to commit 100% of the trading value to open a position. However, CFDs provide the opportunity to trade with leverage, allowing you to control a larger position with a smaller initial investment. This means you can potentially increase your profits if the market moves in your favor. However, it’s important to note that leverage also increases the risk of losses, so proper risk management is crucial. With CFD trading, through leverage and margin, traders only need to present a fraction of the actual capital to open a position.
Leverage allows a small fluctuation in the price of a CFD to be amplified into a larger change in profits and losses, with the degree of profits and losses depending on the degree of leverage used.
Also read: Advantages of crypto trading with CFD
(4) Lower trading costs
Since CFDs are not related to the ownership of financial assets, trading CFDs for stocks or stock indices does not involve paying stamp duty or delivery fees for futures. However, in some countries, CFDs are not exempt from stamp duty, reducing overall transaction costs.
Certain markets require minimum amounts of capital for day trading or impose limits on the number of day trades that can be made in certain accounts. The CFD market is not subject to these restrictions, and all account holders can day trade if they wish. Accounts can generally be opened with just $1,000, although $2,000 and $5,000 are common minimum deposit requirements.
(5) Non-ownership of the underlying asset
When trading CFDs, you do not own the underlying asset. This eliminates the need for physical ownership, such as storing or delivering the asset. It also simplifies the trading process, as you can enter and exit positions quickly without the logistical complexities associated with owning the actual asset.
CFDs are traded in liquid markets, which means you can usually enter and exit positions with ease. This ensures you can take advantage of price movements and have greater control over your CFD trading activities.
(7) Access to advanced CFD trading tools
Many CFD brokers offer advanced CFD trading platforms equipped with various tools and features. These platforms provide real-time market data, technical analysis indicators, and risk management tools, allowing you to make informed trading decisions. But traders should choose brokers which are authorized and regulated by multiple international authorities since these platforms provide a safe, fair, and transparent CFD trading environment.
(8) Hedging opportunities
CFDs offer opportunities for hedging strategies. You can hedge your existing positions in the physical market or offset potential losses by taking opposite positions through CFDs. This allows you to effectively manage risk and protect your portfolio against adverse market conditions.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].