Contract For Difference (CFD) is a leveraged product and also a derivative that lets the trader speculate on the movement of the financial markets without owning the underlying asset. In CFD, there is a contract that serves as an agreement of both buyer and seller that they are willing to exchange the difference between the entry and exit price of the asset that they have traded.
Advantages of CFD trading
CFD offers various advantages that are not seen on other derivative instruments. If you take a closer look at it, there are advantages as well as disadvantages in trading CFDs. But if you are determined to learn, you will find several ways to counter the risks involved in your trades that are one of the main reasons for your loss.
Trade on Rising and Falling Markets
Traders in CFD can speculate on the rising and falling markets. Since you are not just allowed to speculate on the rising markets, this paves way to more opportunities to earn profit. A trader can either buy or sell a CFD and take the difference as the profit.
Traders can go long or short in CFD. There is no such thing as “short selling” regulations unlike other markets. This means that the product can be shorted anytime the trader wants to do so. There are also no “shorting costs” too because the trader does not actually own the underlying asset. Most brokers also do not charge additional charges when you trade CFD. The most common way for brokers to earn is through the spread, which is the price for buying a product and the bid price whenever they want to short the trade.
You Invest In A Wide Range of Markets
Your broker will offer you a wide range of markets through an online trading platform. No matter the number of markets you choose to trade, you can do it in a single account, making it very convenient for multiple market traders. Traders can trade on markets like Forex, indices, stocks, commodities and bonds.
Margin Trading is Allowed
Leverage is offered to CFD traders. With CFDs, you can open more positions because you are only required to deposit a small amount known as margin. This margin is just a portion of the full amount of the underlying asset that you wish to trade. This type of trading is beneficial for new traders who are still feeling the market. But be wary – leverage also has its disadvantages. Although it mirrors wins, it also mirrors losses. Therefore, you must take extra measures to counter the risks. Make sure you incorporate your trades with a stop loss or other pending orders to avoid suffering from huge losses.
Less Tax Liabilities
Since traders are not the real owners of the underlying asset that they are trading, this means that they are free from paying tax liabilities, particularly those traders from the United Kingdom. They do not need to pay for the Stamp Duty which is normally collected from company stock owners. This saves you some bucks which you can use to open other trading positions.