CFD trading is an easy and convenient way to trade on the international markets. It is also a flexible alternative to other types of trading, giving you access to multiple markets from a single account. CFDs are traded on margin so you can enter the market with only a fraction of the actual capital needed. You can use CFDs to speculate on the future movement of market prices, regardless of whether they are rising or falling.
The big advantage of investing with CFDs and FX is the use of leverage. With investing there are always risks involved. Because you use your capital as margin to open a position you can lose your initial deposit in a short period of time. CFDs and Forex are useful for investing in the short term because there is speculation on both rising and falling prices at relatively low costs. With traditional buying of shares, you can only make a profit if the price of shares goes up which might take a long period of time. For something that shows results in the short term, and you look to invest with a relatively low deposit in shares but have a large asset exposure, then opt for investing in CFDs.
A Contract for Difference (CFD) is an agreement between two parties to exchange the difference between the current value of an asset and its value at the buy/sell time. It is a product which allows you to profit from the price movements of shares, indices, futures, and other financial instruments, without actually owning them - there is no physical purchase of the asset. This means that if you buy CFDs on Vodafone shares, for example, you do not acquire the actual shares. Nevertheless, you can profit from the difference between their buy and sell prices.
CFDs also allow you to hold both ‘long’ and ‘short’ positions. The benefit of this is of course that significant gains can be made both on the way up and on the way down giving you the opportunity to profit in a falling stock market.
One of the advantages of leveraged trading is that you can acquire a position that is much larger than your account equity. This is known as margin trading, which is the ability to control more funds (borrowed from your broker) than the amount of your deposit, in order to increase the potential return of an investment. Contracts for Difference can be traded on margin.
With a margin requirement of 5% (leverage of 1:20), for instance, you can trade with £10,000 by having just £500 (5% margin) in your account. This means that you can take advantage of the smallest market movements by controlling more money than you actually own.
While leverage can be advantageous in increasing your profits, it can also significantly increase your losses, so it should be used with caution.
With CFDs, you can easily switch between asset classes. If traders are bearish, anticipating a market will go down, they tend to move into Indices and short the index. They switch back to speculating on individual stocks when they’re more comfortable with the performance of the equity markets. And not only that.
The fall in global Interbank offered rates (Libor) has made margin trading much cheaper than it used to be in the past – for instance holding a long UK stock position held open for less than 7 weeks will typically work out cheaper via a contract for difference than conventional share dealing, although longer holding periods will normally mean that the interest will outweigh the stamp duty saving making the shares the better option.
You can trade any size position with CFDs – however big or small, you can also keep a position during overnight trades on most instruments.
Most CFDs don't have an expiry. You don’t need to worry about an expiry at the end of the trading day. The position will roll over to the next trading session. With commodities, the contracts are automatically rolled into the next month.
The expanded trading hours for CFDs give you more flexibility to open or close your positions. Most underlying instruments can be traded around the clock. Pending Limit and Stop orders can be executed at any time during the available trading hours if necessary.
The opinion and information that we include on this website, in writing or through social and digital media, does not constitute any investment recommendations. We only reflect our point of view on the markets. Therefore, we are not making recommendations to buy or sell any financial product.
By trading with securities and derivatives on margin you are taking a high degree of risk. You can lose all of your deposited money. You should start trading only if you are aware of this risk that is involved.
CFDs & FX are complex instruments and come with a high risk of losing money rapidly due to leverage.
