CFD stands for Contract for Difference, is an agreement between the two parties i.e. the buyer and the seller wherein both parties come toa mutual decision. The buyer agrees to pay the price to the seller in exchange for stock. CFD trading works well for both parties in such a sense that the buyer gets his stocks at less price, though while entering the price was high and same the seller benefited from selling the stocks at a higher price to the buyer.
Despite these, there are some other advantages of CFD trading-
- Entry to a wide range of markets- With one trading account, it becomes easier for the traders to enter a wide range of markets. Among different countries, it becomes possible to trade currency, index with ease.
- No payment of stamp duty required- It is because you do not need to physically own underlying assets when trading CFDs. Hence, there is no need to pay stamp duty when trading across different nations. You can also seek professional advice, if necessary.
- Lower trading costs- Depending on the instrument the trader choose and the period of holding that instrument, the trader can benefit from low trading costs.
- Risk management- The investors could minimize the risk at the time of trading CFDs by placing a stop loss and gain to exit orders.
- Benefit from price movement- As no underlying asset is required, therefore, both seller and buyer take the advantage of the movement of prices.
- No expiry- There is no set expiry date for CFD trading. Traders who are about to take the long term position should be patient while taking a long-term approach and wait until the time is right to sell.
- Hedging options- Hedging is a useful strategy that every investor should adopt to minimize his losses. For example- you have taken a risky position, and to minimize such risk, you can open another position to generate healthy earnings from that position. Hence, no matter which riskier position you have opted for, you can diversify by taking a hedging route that comes with CFD trading.
- Margin- Traders can trade on a margin. Margin means to leverage that allows traders to put a small portion of the notional value of the asset. So, if you are buying 100,000 pounds worth of shares with a broker, then you have to pay the hundred thousand pounds to him and he would give you the shares. The margin requirement for that share is just 10% and then you just have to put 10,000 pounds to control 100,000 pounds CFD.
- Long and short- The traders can speculate on the movement up in price and speculate on the movement down in price.
- Ease of execution- Trading with CFDs is the same as trading with shares. Therefore, the traders do not find difficulty when trading CFDs.
CFD trading is a great investment option that helps investors to maximize capital investments and profits. Therefore, the above-mentioned advantages of CFD trading help to mitigate the risk of traders.