Why should you trade CFD? What good does it give to traders like you? As a financial derivative, the Contract for Difference (CFD) allows traders to predict the movement of the market through the use of a wide range of securities like commodities, currencies, indexes, and bonds. There are a lot of advantages that CFD can bring forth its traders. Profits can be gained even if the market price decreases or increases. All of these are possible without actually owning the assets while the profit is measured on the net price of the entry and exit points. Aside from all of those, here are some of the reasons for the rising popularity of CFD.
1. CFD is Easy to Start
Did you know that you can start trading CFD just as little as $200? Trading here does not require a lot of initial deposit. To start trading, you just need a brokerage account. There are already a lot of brokerage platforms nowadays that allow you to deposit a minimum amount to be able to trade. Aside from that, they also allow you to trade on different securities. Most importantly, they have stop loss to limit your losses.
2. CFD is Tax Efficient
Because CFD is a private contract drafted by both the broker and trader, it should have a lot of tax responsibilities. But that isn’t the case with CFD. In fact, in the UK, stamp duty is free. Normally, it should have been a 0.5% tax. However, since you do not actually own the shares, you will not be obligated to pay for the tax. You just saved 0.5% from CFD trading. How good is that?
3. CFD Gives A Chance to Hedge
With CFD, you can hedge your investment since you can be selling or buying the asset that you have, to limit potential losses. Another benefit of CFD is leverage. This advantage lets you hedge without even having to commit the money from your pocket. Full or partial, you can either do this on CFD. You can protect yourself from incurring huge losses by obtaining a margin.
4. CFD Provides Shorting Opportunities
Because CFD doesn’t include dealing with their actual security, shorting opportunities are offered in a huge volume. This advantage can either be used to take on a long position or some profitable operation over failing companies, markets, and indexes. If a trader can predict an upcoming downtrend, they can swiftly short just so a profit can still be made out of the difference.
5. CFD Can Be Traded on Margin
You can maximize your returns on CFD using leverage. This is very useful especially to short trades since expanding your profits thru the use of margins on your account sounds a feasible idea. Furthermore, you cannot use margin without understanding its extents. You need to know its terms and conditions right before a trade is entered. Take note that margins can help you maximize your profits but also your losses as well.