A popular form of derivative trading is contract for difference or CFD. This allows you to speculate on the falling or rising prices of quick-moving global financial markets such as treasuries, currencies, commodities, indices and shares. As a SFD is a tradable instrument, it can imitate the movements of the underlying asset. Basically, it is a kind of deal or contract between the client and the broker. There are a number of advantages that CFD trading offers and these have helped in increasing the popularity of the instruments over the past few years.
How a CFD works
Trading CFD is not that complicated. All you have to do is to select the asset that you want to trade and enter your order. If you think that there is a chance for the price to increase, then you can enter a “Buy” order. An expert of www.easymarkets.com says, “You should always remember that when you are entering a CFD trade, the position will show you a loss that is of a size equal to the size of the spread.”
There are a number of benefits that CFD trading offers. Some of them are discussed in this article. Read on.
1. Higher leverage
There is leverage in CFD trading. To simplify, if you want to open a position, you will have to pay only a fraction of the total value that the trade has. This is called margin. Traders can magnify profits with the help of leverage. On the flip side, this can lead to losses being magnified as well. Before thinking of taking advantages of these, it is recommended that you fully understand the risks that margin and leverage entail.
2. No stamp duty
In a CFD trade, there is no stamp duty to be paid. This is not like traditional share dealing. However, change can occur in tax laws.
3. Trade on both falling and rising markets
With the help of CFD trading, you can not only trade when the price of a product is going down, but also when the price of a product is going up. You can try and benefit from selling as well as buying opportunities. You will find a lot of traders who use CFD as a means of hedging their portfolios through periods that are of short-term volatility.
4. Use CFDs as a portfolio hedge
If you think that your current portfolio might experience a loss, then you can short sell by utilising CFDs. This can assist you in offsetting any portfolio value losses. You may consider CFDs as great hedging tools. You will find a number of organisations as well as individuals who use these so that they can hedge against portfolio losses.
Now that you know the benefits of CFD trading, it will be a lot easier for you to trade in the foreign exchange market.