15 reasons why you should use CFD
Contracts for Difference (CFDs) are derivative products that allow traders to bet on the price movement of an underlying asset. CFDs can be used to trade a wide range of assets, including stocks, indices, commodities, and currencies. This article will discuss why you should consider using CFDs to trade the markets. Keep reading to learn more.
CFDs offer leveraged trading
Leverage means you can trade with a smaller amount of capital than is required for traditional trading, as you only need to put down a small deposit (margin) to open a position. This benefit can allow you to make more significant profits, or losses, from price movements.
You can go short and long
With CFD trading, you can take advantage of falling prices by opening a ‘short’ position. This position means you will profit if the price falls and lose money if it rises. This flexibility is not available with traditional investing, where you can only profit from rising prices.
No stamp duty
When you buy UK stock, you must pay a stamp duty of 0.5%. This charge does not apply to CFD trades as you are trading the underlying price movement and do not actually purchase the asset. With that, you get to keep more of your profits.
Trade on margin
You only need to put down a small deposit when trading CFDs, known as a margin. This deposit allows you to trade with less capital than would be required for traditional trading and can potentially lead to more significant profits or losses.
The ability to trade around the clock is one of the main attractions of CFD trading. Major markets like the UK’s FTSE 100 are open from 8 am to 4:30 pm, but you can trade with CFDs as there is no ‘end of day’ closing price.
No need to own the underlying asset
When you trade CFDs, you never own the underlying asset, a share, commodity or currency. It has advantages as you don’t have to pay the total value of the asset, but it also means you won’t benefit from any dividend payments or other corporate actions.
Access to international markets
With traditional investing, you can only buy assets listed on your local stock exchange. However, you can trade a much more comprehensive range of markets with CFDs, including those in other countries.
Trade in both rising and falling markets
One of the fascinating features of CFD trading is that you may profit from rising and declining prices. This attraction occurs because you can open both ‘long’ and ‘short’ positions, meaning you will make a profit if the price rises.
No need to pay the total value
When you traditionally buy meme stocks or other assets, you have to pay the total value of the asset upfront. However, with CFDs, you only need to put down a small deposit (margin), so you don’t have to tie up large amounts of capital.
No broker fees
There are no broker fees or commissions when trading CFDs, so you keep more of your profits.
CFD trading may offer some tax advantages depending on your country of residence. For example, in the UK, profits from CFD trading are currently exempt from Capital Gains Tax.
Smaller price movements can lead to significant profits
It would help if you usually had large price movements to make decent profits with traditional investing. However, small price movements can lead to significant profits or losses because you trade on margin with CFDs.
Use stop-loss orders to limit your risk
You can use stop-loss orders to limit your risk when you trade CFDs. If the price moves against you by a certain amount, your position will be automatically closed at the stop-loss price, limiting your loss.
Take advantage of leverage
With CFD trading, you can use leverage to trade with more capital than you have in your account. Leverage magnifies both your profits and losses, so it’s essential to use stop-loss orders to limit your risk.
Try before you buy
Many online brokers offer demo accounts which allow you to try out CFD trading with virtual money before risking any of your capital. Demo accounts are a fantastic method to familiarise yourself with the market and the platform without risking money.
All in all
These are just some reasons you might want to consider trading CFDs. However, it’s important to remember that CFD trading is high-risk, and you can lose money. Therefore, before you begin trading, you should always assess your risk appetite and ensure that you are not investing more than you can afford to lose.