Knowing what is a CFD is not enough. Aside from it being traded on the same platform of Forex trading, CFD trading has many advantages. Here are some of its key benefits.
- Rising and Falling Values in Markets
A CFD trader can take a short (sell) or long (buy) position in taking advantage of the prices up and down movement in value. Both rising and falling markets can be a potential benefit when trading a CFD.
- Leverage Trading can Maximize Trading Capital
Trading on margin is one of the main advantages of CFD trading. It only requires paying a small percentage of the position instead of paying the full value of the large position. This is called “initial margin”. However, as trading on margin can potentially maximize the profits, it equally magnifies the potential losses. There is a possibility of losing all the investment if the trader is a retail client. There is also a tendency for professional clients to lose more than their deposits and there may be a need to deposit additional funds to mend up their losses.
- Diversification and Hedging
With CFDs, traders always diversify and hedge their portfolios, especially in volatile markets. Having low margin requirements and trading costs when trading CFDs, it is an effective way to broaden trading opportunities and diversify a trading portfolio into different international markets.
- Access to a Broad Range of Markets
CFD trading exposes the trader to a broad range of markets using only one account. Trading currency, commodity, and index CFDs from across the world (Asia, America, Europe, etc.) is possible.
- Similarity to Traditional Trading
CFDs are more like traditional trading and investing compared to their derivatives like futures, options, and spread betting. It is due to buying and selling of contracts which are designed to reflect the assets they act for. A single CFD tends to act as a standard unit of trading of its underlying market. Decide the number of contracts to buy or sell to set a position size.
- No Stamp Duty
Paying a stamp duty is not a requirement since trading CFDs does not physically own the underlying asset. But based on individual circumstances, tax laws are subject to change. Tax laws may differ from one country to another. Seek independent advice if necessary.
- Lower Trading Costs
The cost of CFDs depends on the instrument the trader chose to trade and the length of time the position is open.
- Risk Management
The trader can place a Stop Loss and Take Profit to exit orders. This is possible even if the trader is not actively viewing the trades. Aside from that, the trader can also place Stop Entry and Limit orders to aid in entering the market at the preferred levels. Several risks management tools can be applied to the positions to limit and manage the risk.
While there are many advantages when trading CFDs, there are also several potential risks when trading leveraged financial products. Knowing what is a CFD does not end with just knowing the advantages. As someone who is interested in trading CFDs, knowing risks and setting a strategy to manage them will be a key to successful trading.