5 Reasons Why You Should Be Trading CFDs

by James on July 26, 2017 · 0 comments

investingCFD trading or Contract for Difference trading might be something that you have never heard of before but if you are an active trade, then you will want to add this to your investment strategy?

The reason is simple, CFDs allow traders to realize profits on the underlying assets without owning said assets.  While this might sound like it is too good to be true, CFDs allow trading houses to cover small differences in the share prices they are offering and the prices at the time of execution on the market.

Even more so, they all the active trader to profit off these differences as a fraction of the cost of buying the underlying stocks.  While these trades have been around for years, they haven’t been publicized among the public and as such, active traders will need to sign up with a specialty broker to leverage this opportunity.

For example, if you Googling CFD Australia, then you might want to look at the brokers in this market would have good services for traders in the land down under and beyond.   The reason to consider CFD trading on the ASX is that the market offers a good mix of stocks at decent valuations and volume with a reputation for good governance.  As such, it is a relatively low-risk market to hone your CFD approach.

Now that I have introduced CFD trading, let’s take a closer look at the five reasons why you should consider making these trades.

  • Leverage

This is a magic word in finance and in the case of CFDs, it is something which you can take on with little to no risk.  The reason is that CFD are used to cover the spread between when an order was placed and executed.  As such, the amount at risk is usually pennies on the dollar.

While the trading houses won’t let a CFD holder realize 100 percent of the increase when a CFD trades to the upside, the returns can be substantial.  In fact, the gains can be up to 95 percent, or more in some cases, of gain.

However, there is a catch.  Well, let’s face it the trading houses are not giving away money for free.  As such, the catch is if the CFD eventually trades to the downside.  In that scenario, you will end up losing more than your initial outlay and will owe the house money.  Given, this catch the best strategy is to use CFD to either leverage to the upside or to hedge against broader downside risk.

  • Diversification

The golden rule of portfolio management; after all, you don’t want to put all your eggs in one basket.  In this scenario, CFDs allow you the opportunity to spread your assets over a wider range of classes as well as increasing your position on certain stocks when the situation warrants it.

By the way, you can also go long or short with CFDs and this means you can profit from a market move regardless of the direction.  This adds to your diversification strategy as a smaller percentage of your portfolio is tied to the market needing to move in certain direction.

In addition, these trades can be rather short and this makes CFDs a good instrument to test out a thesis which you are planning to deploy later.

  • Choices, Choices

Unlike traditional asset classes, you can trade CFDs on a wide variety of markets.  Think about it, every trade, regardless of the market, has a slight variation between the execution price and the price at settlement.

This is a normal function of markets and while these differences tend to be a small fraction of the total trade, the large institutions which execute these trades are more than happy to cover these differences with other people’s money – after all, this is how finance works.

However, this does not mean that you should switch from market to market on a whim.  Instead, you should understand the characteristics of each market before undertaking a CFD trade.  This is not because CFD trading is overly complex, it isn’t, but rather because each market has its own unique way of functioning.

  • Save on Fees

So, you get increased leverage, diversification, and access to more markets to CFDs, but what else is there?  How about lower fees?  I know you like the sound of that.  In fact, the fees charges by CFD brokers are usually a fraction of what traditional brokers charge.   As such, you can net higher returns by trading CFDs.

  • Less, Risky Business

Now trading is without risk, but when it comes to CFDs these instruments do carry less risk than other assets.  The biggest reason for this is the reduced leverage.  However, you can also add lower fees and a big upside to other trades – margin, for example – and CFD trading is a relatively risk-free way to pump up your returns without betting it all.

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