Contract for Difference (CFD) trading is a trading method favoured by many investors who have found it to be successful.
Yet for a lot of individuals, beginning a new way of trading can be somewhat off-putting, due to fears that it will require learning a whole new style that can involve a lot of time and effort that may not be worth it.
First you will need to decide whether CFD trading is appropriate to your trading style, as it is based around short-term trading rather than long-term. If you’re a short-term trader though, then starting to trade CFDs will be worth the effort for a number of reasons.
Easy to Pick Up
For those already trading stocks and shares, understanding and picking up CFD trading is relatively straightforward. Everything you know about share trading can be simply transferred and applied to CFD trading. The prices of contracts for difference move in the same way as actual share prices or the underlying assets.
This means that if you are already an expert in buying and selling stock in certain markets, then you can use this knowledge when investing in CFDs. As the same market movements occur, it gives you an advantage against those who are completely new to the practice.
Diversification
Starting to trade CFDs is a great way to diversify an existing investment portfolio, but it also allows those who are just entering the world of trading to create a diversified portfolio from the off. CFD traders have the opportunity to trade in a variety of markets and instruments.
From the popular stocks and shares of your own country, to equity indices, commodities and more, there are thousands of options available. It is advisable to start out in one particular area until you have a good understanding of it, before expanding and diversifying into others.
Flexible Ways to Profit
One of the main advantages of CFD trading, and best reasons for putting in the effort to begin doing so, is that it provides more flexible ways to profit. Unlike buying stocks and shares, currencies or precious metals for example, whereby they must increase in value for you to profit, with CFDs you can profit from falling markets too.
With CFD trading you either go short or long. Going short means that you expect the underlying asset to decrease in value, which if it does you will earn a profit from. While going long is the opposite, expecting it to increase in value. Again, if it does then you will profit, if it doesn’t then you will make a loss.
Cheap Commissions and Low Taxes
There are far lower commissions involved with CFD trading than many other types of trading, depending on the broker you use it can be over half the price of traditional trading. For those with a lower starting capital this is very advantageous.
In the UK there is no stamp duty attached to CFD trading either, unlike when investing in stocks and shares. This is usually one of the greatest costs, though you will still have to pay capital gains tax on any earnings. It is also a leveraged product, so you can trade with more than you actually have, which can greatly improve profits (but also losses).
Zero Ownership Risk
You do not own the underlying asset when trading CFDs, which means there is no risk of you having to take ownership for anything. Unlike when buying stocks, commodities or more, you will feel far more responsible for them and be more at risk should they decrease in value. That is likely to have more of a negative impact on your finances than when trading CFDs.
Consider these benefits and decide if CFD trading could fit into and be a good addition to your investment strategy.
