Contract For Difference (CFD) is a form of trading wherein traders speculate in the financial market but don’t require to own the underlying asset. What are the advantages of trading CFD? Is it suitable for you? Understanding the advantages of CFDs lets you determine if it suits you better or not.
What Does Trading CFD Means?
Contract for Difference allows the traders to speculate in the financial market without actually owning the underlying asset. Investors speculate whether the asset price will rise or fall and the difference of the entry and exit points will be paid to the trader or to the broker, whoever will be on the winning side.
Leverage Should Be Used in Moderation
As the top benefit of CFD trading, it is also one of its disadvantages as too much leverage won’t be healthy for you. Leverage is a double-edged sword that can give you great advantages and disadvantages too if it’s not handled very well. The outcome of the leverage in Contract for Difference is determined based on the profits acquired from the full-size position of the underlying asset and not the initial deposit of the traders.
With CFD, you can trade with leverage. This makes it popular among retail traders, especially because you only need a small deposit to open a position in the market. Opening a couple of positions means that your income will also be mirrored. It enhances your returns on investment enhancing the efficiency of your trading capital.
Diversify and Find The Perfect Trading Platform
With CFDs, you can diversify your portfolio and allow more opportunities to trade in the financial market. You can trade with different instruments like Forex, commodities, stocks, indices, options, and cryptocurrencies, just by securing a small initial deposit. Additionally, traders are allowed to do trading in the international market conveniently, with the use of one trading account.
Compared to a traditional financial market, CFD providers are also able to work on extended hours so that investors can still trade even after the underlying exchange has been closed. But, be mindful of these extended hours as this could cost you additional fees for overnight trading.
Should You Trade Long or Trade Short?
Since CFDs is all about price speculation, this goes to show that traders will be able to take advantage of the market, whether it is rising or falling. Trading long or short is also very easy with CFDs plus it’s an added advantage that you won’t be paying for stamp duty because you don’t actually own the asset. Selling is also easy compared to the transaction made with a traditional stockbroker. If the investor thinks that the market will rise, they can go with long positions. On the contrary, if the trader thinks that the market will fall, he will then take a short position.
Therefore, it is very important to take your knowledge to the next level when deciding to trade CFDs. You must take into consideration the leverage ratio of trading CFDs and new traders shouldn’t take the risk of starting with high leverage trading. For starters, go with low leverage and slowly increase your position size as you get accustomed to the trading industry.