Why to trade CFD?
There are many different ways to speculate on the markets; everyone has different opinions and techniques and this has made it possible to introduce CFD trading. A CFD is a Contract For Difference. In essence you will be able to agree a deal with another party; one of you will be predicting a rise in the price of an asset; the other will be predicting a decrease. The one predicting an increase is always referred to as the buyer.
The seller hopes that the price does decrease as the buyer must then pay them the difference in price between when the contract started and when it finished. The same is true for the seller if the price increases.
CFD Trading actually has a range of other benefits which have made it a very popular way of trading by businesses for many years. It is only recently that individuals have become aware of these benefits and started to trade in this manner.
Benefits of CFD Trading
CFD Trading has been possible since the early 1990’s. It was originally introduced to replace equity swaps as there were a range of cost savings available when CFD trading. This includes not needing to pay stamp duty and undertaking margin trading.
Leverage is a key attraction of this type of trading. Margin trading will allow you to take part in contracts worth far more than you can actually afford. For example, trading on the stock market generally requires you to have all the funds for your trade in advance; you then provide these to your stock broker who places the trade for you. However, with CFD trading you only need a percentage of the funds at the start. This can be as low as one percent; meaning a $100,000 trade needs just $1,000!
Short selling is another benefit which CFD trading enjoys over standard stock market investing. You can trade on a price rise or fall. If you are therefore confident that the price of a specific asset will decrease you can become the seller. If you wish you can also choose to hedge your bets! This involves placing a sell contract (for decreasing prices) and a buy contract (for increasing prices). Providing the profit on either contract covers the cost of both contracts you will end up either breaking even or in the money!
The ability to hedge means that you can minimize your losses and even protect yourself when the market is volatile. Generally hedging with CFD trading involves placing two contracts simultaneously. However, you can choose to stagger these slightly in the hope that both contracts end up correct and your returns are significantly higher. Of course, this is a high risk strategy and one you should consider carefully before employing. If it is possible for both contracts to be right it is also possible that both can be wrong and you will lose even more funds!
Stamp Duty is often overlooked but can make a significant difference when dealing with high value trades. It is currently set at .5%. Whilst this may sound insignificant, when your leverage a $100,000 CFD trading contract you will find the stamp duty is $500. Fortunately, stamp duty does not apply to CFD trading although it does apply to general stock market activities. The savings can be substantial!
CFD trading conclusion
The range of benefits which can be utilized by anyone undertaking CFD Trading is surprisingly and worth considering. The ability to leverage can dramatically increase your earnings whilst hedging will give you some form of protection. Of course, CFD trading is high risk and leveraging, in particular, can generate huge returns or equally as big losses. It is essential to consider hedging and stop losses to ensure your quest for a high income does not take all your funds and more.
A stop loss will immediately stop a contract if it reaches a certain level of loss for you. This will need to be established by you before the contract starts but is a valuable fail safe. CFD trading is probably better undertaken by those with some market experience; however anyone can be successful with a little research and caution.