As a person considering to trade CFDs, it is important to note that this type of trading can be quite beneficial. Before looking at the benefits of online CFD trading, it is important that we, first of all, understand what CFD is.
What is CFD?
CFD, which stands for Contract for Difference, is an agreement reached by two different parties to exchange the differences between the closing and opening price of a contract. CFDs are derivative products where traders can trade on live market price movements without necessarily having to own the underlying instrument on which the contract is based.
What Is CFD Trading?
As a CFD trader, you can use a CFD to guess how market prices will move in the future irrespective of whether the main markets are falling or rising. When it comes to CFD trading, you could opt to sell (known as going short) making it possible for you to profit from the prices as they fall. Alternatively, you could hedge your portfolio to offset any losses in value your physical investments might experience. And with thousands of markets where you can trade on, gaining exposure to markets you probably never knew existed or never had access to becomes easier and more realistic.
At the same time, these contracts are leveraged products that enable traders to trade by paying a fraction of the overall value of the contract. Making it easier for you to considerably increase your ROI or return on investment. However, it is important to remember that a higher leverage could result in losses that will probably exceed the initial deposit you made. As such, when venturing into the world of online CFD trading, it is important that you take some time to think things through before making any decisions.
Ability To Go Short or Long
With CFD trading, you can either go long (buy) if you think that market prices will be rising, or go short (sell) if you think that market prices will plummet. As such, if you believe that a market or company will experience loss in value in the near future, you can use a CFD to sell it. If that specific price drops, then your profits will rise in line with its fall in value. However, should the market move against you, your losses will increase. These contracts can, therefore, be considered as a more flexible alternative to trading market price movements as they make it easier for you to benefit from even the slightest move, irrespective of whether or not the markets are falling or rising.
Ability To Hedge Your Portfolio
If you think your existing portfolio might lose most, or some, of its value you can use a CFD to offset the loss by short selling. For instance, let’s say you hold about $5,000 worth of a company’s shares in your personal portfolio, you can short sell the equivalent of the company’s shares through CFD trading. Should the company’s prices fall by about 5% in its underlying market, then the loss in value of your share’s portfolio will be offset by a gain in your CFD trade short sell. Interestingly, many traders today are using CFDs to hedge their portfolios – especially in unpredictable markets.
The beauty of online CFD trading lies in the fact that you can access and trade on your account wherever you are and whenever you want, especially when the prices in a market are moving fast. With most online trading accounts placing no restrictions, you can easily access your account 24/7 all year round.
No Stamp Duty
As these contracts are derivative products, you do not have to own the underlying instrument. As such, there is no need to pay any stamp duty; making it possible for you to save up to 0.5% on each trade’s value. However, it is important to remember that tax laws are subject to individual circumstances and can change at any given time.