Contracts for Difference (CFD) are attractive trading instruments to many traders. This financial derivative has numerous benefits that draw the attention of amateur and expert traders. CFD trading is very flexible and an efficient alternative to traditional investing.
Here is a list of reasons why CFD Trading is popular among traders:
- No stamp duty
A stamp duty is a tax imposed on numerous acquisitions, including selling real estate, cars, and assets belonging to a business. Remember, CFDs give traders the opportunity to speculate on markets without physically owning the underlying asset. Since you do not own the underlying asset, you won’t have to pay stamp duty.
- Trade in both rising and falling markets
Another solid advantage of CFD trading is that traders are not restricted to open in only one position. CFDs are very flexible financial instruments because it can make you trade in both falling and rising markets, allowing you to produce more effective strategies for more profit.
- Margin Trading
One of the most notable aspects of CFD is that you can trade using margin. This means you don’t need to purchase the full value of an asset to open a position, you only need to deposit a fraction of the actual trade size of each transaction. For example, you have a CFD share for $100, if your broker has a margin requirement of 5% then you only have to pay $5 to open the position.
Trading using a margin means you can multiply your profit although it is important to recognize that losses can also be multiplied in margin trading. Thus you can lose more than your initial deposits.
- Hedge Positions
CFDs are one of the best hedging tools for traders. If you are anticipating a loss in your current position then you can limit your potential risk by using a CFD to hedge your position. For example, if you have a short position in an asset that is accumulating losses, you can open a long position to balance your losses. The long position will start to gain profits once the prices move in the upward direction.