10 Things Most People Don’t Know About CFDs
Statistics obtained from top online trading firms like CMC Markets are suggesting that the popularity of Contracts for Difference or CFD is growing pretty rapidly. However, still, there are a few things that most people don’t know about the CFDs. Read on to know about them.
- CFDs will allow you to use your capital more efficiently
CFD trading will allow you to trade using margin. This means it will provide you with ‘leverage’, as a result of which you will be able to trade without putting down the entire value of a particular position. What’s more, as you are not investing all your money in a single transaction, you will be able to invest it somewhere else.
- CFDs will not expose you to tax burden
One of the biggest differences between traditional share dealing and CFD trading is that unlike the former, the latter will not require you to take the physical ownership of any underlying asset. As a result, you will not need to pay stamp duty on CFD trading.
- CFD trading will allow you to trade both on falling and rising markets
CFD trading allows people to trade both when the cost of a product is going down and going up. This means, if you try, you can benefit both from the buying and selling opportunities.
- For being successful, you should focus on only a few markets
To achieve desired CFD trading success, you must focus on trading a handful of markets. More importantly, trade only the market you are familiar with. The more you will research the more you will become familiar with the movements, patterns, and behaviours of a particular market. Over time, you will develop in-depth knowledge about the factors affecting the prices and learn how to manipulate those factors.
Instead of concentrating on several markets together, put in your best efforts to find out what kind of announcements can result in volatility in the instrument picked by you.
For instance, if you have decided to trade oil, you must know that the EIA publishes a Petroleum Report every Wednesday and that report influences oil price volatility significantly. If you are not aware of the kind of impact the said report has on oil price, it’s unlikely that you’ll achieve anything significant.
You’ll have to gather such vital information through research irrespective of the market you are trading in.
- CFDs allow risk management through “stop-loss”
When the market price will move against you, a “stop loss” will assist you in stopping your losses. To be more precise, a stop-loss is a closing order, in which the investor needs to specify the amount of risk he/she wants a particular trade to have. Opting for stop loss would mean that the moment the market would start moving in the opposite direction causing you a loss your trade will be closed automatically at the risk level specified by you.
You have the freedom of deciding at what level you would want a position to be closed. This decision will have to be taken when opening the trade; if you want, the country’s law would also allow you to edit existing positions.
- CFDs will allow you to implement hedged positions
Another procedure investors are allowed to adopt for limiting potential risk is the use of hedged positions. Suppose, a person trading a stock has a long position on it and suddenly the stock starts accumulating losses; in such cases, the person will have the option of opening a fresh position on the opposite position using a shorter CFD.
- CFDs offer convenience
Even if you are a trader who is currently trading forex, you will be allowed to trade commodity CFDs. What’s more, you will be able to trade on the same platform you were trading forex on and use a few of the tools you were using for forex trading.
- CFDs will offer flexibility with contract sizes
The majority of the top CFD brokers will provide you with a wide range of trade sizes that you will be able to use for various kinds of investment account and diverse trading styles.
- CFDs enable diversification
CFDs allow traders to trade in a wide range of markets and instruments, which include commodities, foreign equity indices etc. This, in turn, helps traders in diversifying their respective trading portfolios.
- CFDs will provide you access to liquidity
The CFD prices are known to mirror the activities in the underlying markets directly. As a result, other than providing you access to the liquidity offered by CFD providers, CFDs would also give you access to liquidity in underlying markets.