What are the benefits of trading CFDs? Know in detail

Contracts for difference (CFDs) are used to profit from the difference in the opening and closing prices of a financial instrument between the time a contract is open and when it is closed. The market for trade is chosen by the investor and they open a CFD instead of making a physical purchase. CFDs offer significantly greater leverage compared to traditional financial or commodity trading and have grown tremendously in popularity amongst traders because of their numerous advantages.

The Benefits of Trading CFDs

Often described as ‘share trading with bells and whistles,’ CFDs are ridiculous to understand and to trade. CFD trading is essentially the same as traditional share trading with concurrent movements in CFD and share prices.

  • Trades can be executed instantly and the dealing room is available round-the-clock for five days a week.
  • CFDs can be used to earn a profit regardless of market conditions. A trader can profit from rising prices by “going long” as well as from falling prices by “going short”. This is a huge advantage given the current volatility of financial markets around the world.
  • There is no expiry date attached to a contract for difference. Traders can hold CFDs for as long as they like or sell them quickly if they so choose. CFDs will not become worthless with the passage of time as other financial derivatives are wont to do upon expiry.
  • Traders can open positions with deposits or margins ranging as low as 1 to 20 percent of the contract value instead of paying the full underlying value. The advantage of gearing, or being able to trade on margin, is that traders have cash available to invest elsewhere while still enjoying trades of sizable positions.
  • Perhaps the biggest advantage of trading CFDs is leverage. Granted, it is risky to do so but the enhancement in returns and the levels of market exposure achieved are benefits not easily ignored.
  • CFD trading is not only profitable, it is highly convenient as well as stocks, indexes and commodities can all be traded using a single trading account.
  • Another attractive feature of CFDs is that traders can choose the number of shares they want to trade at instantly tradable prices and get confirmation of their trades at that level except for unforeseen or unfortunate instances.
  • CFDs are also a popular way of hedging investment portfolios where investors do not wish to liquidate their physical stock portfolios.

The benefits of CFD trading are numerous, and so are the reasons for its popularity among investors. CFD platforms are generally quick and efficient, generating daily statements and regular online account reports. CFDs are not bound by the restrictions common to other financial products and are widely available as well as being easy to understand.

Contracts for difference can also be used to hedge other investments and provide diversification to an investment portfolio. They act as insurance against price falls in other investments and offset the losses incurred from the fall in the value of a portfolio. Trading in CFDs also provides retail investors with unprecedented access to global markets such as oil or precious metals and allows traders to speculate on individual sectors from a particular trade as well as on whole indices.