- 1 High leverage
- 2 Easy access to ”everything”
- 3 24/7 or at least 24/5
- 4 Low transaction costs
- 5 No stamp duty
- 6 Make money even when prices are falling
- 7 You can still use traditional risk-management orders
- 8 You can gain exposure to assets you can´t afford to buy
- 9 Speculate on abstract stuff
- 10 Available and regulated in many different parts of the world
Contracts for Difference (CFD) have become immensely popular and for good reasons. Below, we will take a look at a few reasons why traders love CFD:s.
Brokers that offer Contracts for Difference will typically also offer very high leverage, sometimes 1:500 or even higher.
A high leverage means less capital outlay for the trader. For traders starting out with a small bankroll, this is very appealing.
In some jurisdictions, leverage is limited by law. Typically, those laws concern non-professional traders and were created to safeguard small-scale retail traders from taking on a lot of leverage.
Nowadays, many UK CFD trading platforms and brokers offer negative balance protection. Make sure you understand how this works before you rely on it as a part of your risk-management strategy for leveraged CFD trading.
Easy access to ”everything”
There are CFD brokers available online through which you can gain exposure to an amazingly wide range of underlying assets. This is turn makes it easier for traders to spread risk. Instead of putting your eggs in one or just a few baskets, you can diversify based on industry, geography, type of underlying asset, and more. It also means that you can utilize your knowledge of a specific niche
24/7 or at least 24/5
Some types of CFD trading is available around the clock, and can therefore easily be fit into your existing schedule. Forex CFD:s is one example of how you can follow the various markets around the globe to always have something that suits you.
Low transaction costs
With CFD trading, ownership of shares, commodities or similar never changes. You do not become the owner of the shares or other assets you gain exposure to. Therefore, transaction costs can be kept down.
No stamp duty
In some countries, such as the United Kingdom, you have to pay a stamp duty when company shares changes owner. If you use CFDs or financial spread betting instead of actually buying and selling shares, you can avoid this duty.
Make money even when prices are falling
Traditionally, profiting from falling prices would involve risky short-selling techniques With CFD:s, there is no need to take this route. Simply trade using the type of CFD:s that will pay you if your prediction of a diminishing price comes true. You will no beforehand exactly how much money you are risking on each deal.
You can still use traditional risk-management orders
Many CFD brokers will allow you to use traditional risk-management orders such as stop-loss and take-profit.
You can gain exposure to assets you can´t afford to buy
At the time of writing, the share price of Amazon (NASDAQ:AMZN) exceeds 3,280 USD. Do you have enough cash rolling around to purchase 100 shares? With CFD trading, you can gain exposure to the price movement of 100 Amazon shares without actually owning 100 Amazon shares.
Speculate on abstract stuff
Contracts for Difference makes it easy to speculate any pretty much any movements, as long as there is a broker interested in being your counterpart in the deal. This means that you can speculate on things that you can´t actually buy, such as the movements of an index.
Available and regulated in many different parts of the world
Nowadays, CFD trading is not just legal but also well-regulated in many parts of the world, including the European Union where the European Securities and Markets Authority (ESMA) provides a framework for non-professional leveraged CFD trading. This gives consumers peace of mind.
One notable exception is the United States, where CFD trading is prohibited.