Advantages of CFD Trading

By mosesbet · Filed Under CFD Trading Comments Off on Advantages of CFD Trading 

Advantages of CFD Trading

CFD or Contract for Difference is one of the most popular forms of trading today. CFDs are essentially contracts between two parties to pay the difference between underlying financial instrument’s opening and closing price at the end of contact period. They can be bought or sold without any constraints of time. The incredible flexibility offered by CFDs as trading instruments is probably one of the main reasons for rapid rise in their popularity. CFD trading offers many advantages over other forms of trading.

Ability to Earn Profits from Rise as well as Fall in Share/Commodity Prices

CFD trading offers the flexibility to access indices, stocks and commodities from a single trading account. Unlike share trading, investors have an opportunity to maximize their profits not only from a rise in the prices of underlying instruments, but also from a fall in their prices. Taking a long position enables you to take advantage of increasing prices of a share. For instance, when a trader adopts a long position, he may buy a share at $8 with the aim of selling it at $10, thus making a profit of $2 in the process.

In contrast, adopting a short position enables a trader to take advantage of falling prices of a share/commodity. For instance, a trader may sell a share (not owned by him) at $8 with the objective of buying it back at $6, once again making a profit of $2. In today’s volatile market conditions, selling short can offer traders a chance to earn money at times when there are no profitable trading opportunities in the spot market.

Opportunity to Earn High Returns from Low Investments

Margin trading, which enables you to earn a high return from low investment, is another important benefit of CFD trading. In case of ordinary stock market trading, you need to invest the complete transaction amount to be able to trade. But in case of CFD it is not so, you can start trading by investing anywhere from 5% to 20% of the transaction value. This enables you to earn higher returns from lower investments. You can invest the leftover funds in other profitable ventures. This facility can also be used to up the size of your deal for greater returns. Margin trading lets you invest 10 to 200 times more than your actual resources. If effective strategies are successfully applied, CFD trading can help a trader earn big bucks from a small investment.

Low Cost of Transaction

Compared to commission charged by brokers on traditional stock market trade, the amount charged for CFD trade is much lower. Also, in case of CFD trade, you are not physically purchasing the underlying stock. This means you need not pay any stamp duty, which is one of the major transaction costs. Although you need to pay capital gains on the amount of profit earned from CFD trade, the overall transaction cost is much lower compared to that in case of traditional stock market trade.

No Expiry Dates

CFDs do not have any compulsory execution dates or expiry dates. This means that it is possible to hold CFDs for as long or as little time as required to maximize your returns. Cost of financing is the only constraint you are likely to face in holding long term position in CFD trade. But in many cases, absorbing these costs and holding the position can lead to much higher returns.

Common CFD Mistakes to be Avoided

In order to reap the benefits of successful CFD trading, it is necessary to avoid some common mistakes. Risk management is an essential part of CFD trading. Excessive leverage is one of the causes of ineffective risk management. In such cases loses can be much bigger than the cash float value. It is important to know the fundamentals, get acquainted with various systems and understand how they work in different market conditions before enter CFD trade. Proper education and effective money management measures can ensure that your CFD trading experience is a highly rewarding one.

 

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