With CFD trading, you can trade multiple markets in one single account. You can trade shares, Forex, indices, and commodities. But before anything else, it is imperative to understand the concept of CFDs and how you can benefit from them.
What are CFDs? Contract for Difference is a contract shared by investors and brokers to speculate on the market without even owning the underlying asset. When trading CFDs, the trader will have to open a particular position in the financial market. For instance, when you buy gold, if the price rises, the trader has the option to close the trading position to generate profit. But, if the price of gold falls, by the time the trade gets closed, you will be at the losing end of the bargain.
Typically, CFDs are being quoted under the same currency and the same trading hours as well as the ones in the underlying market. For instance, oil CFDs are being traded in US dollars with 24 hours trading availability, just like the ones in oil futures contracts. Naturally, CFDs are designed to mainly replicate the underlying asset as closely as possible.
Why Should You Trade CFDs?
You can buy and hold CFDs for day trading and short-term trading. There is a CFD online trading platform that lets a trader buy or sell an asset instantly, a dozen times every day. This task takes on a much longer time when dealing with traditional share trading accounts. With their speed and flexibility, CFDs tend to attract traders who are interested in short-term trading opportunities. There are no known boundaries in CFD trading and traders come in different sizes and shapes. There are traders who opt to try their luck for minutes while others prefer to hold on for days or so. As long as they know what are CFDs and keep an upper hand on them, traders can surely enjoy their benefits.
Benefits of CFD Trading
There are five main benefits of CFD trading.
- To trade in the rising or falling markets.
- To trade using leverage.
- To trade in multiple assets in one account.
- To trade with low transaction costs.
- To trade with potential tax advantages.
To trade in the rising or falling markets
One notable benefit of CFD trading is the trader’s ability to speculate on rising or falling markets. There are a couple of reasons to go short. It is either the trader wants to speculate on the falling prices or they want to hedge a portfolio. For instance, if a trader speculates that the price of the Swiss Market Index (SMI) will fall, they can simply sell short their SMI CFD. If the speculation is correct and the price really falls, then the trader gets benefitted. However, if the price increases, the trader will be at the losing end.
To trade with leverage
Another well-known benefit of trading CFDs is the use of leverage and margin on every trade. It is possible for CFD traders to open a position in CFD without paying the full amount of the underlying asset and paying only a portion of the investment. Because of that, CFDs have become one of the most cost-effective means of trading.