Forex trading may not be a suitable investment option for all; there are of course some alternatives. One of them is CFD which refers to Contract For Difference. CFD is basically an agreement between two parties to exchange the difference between the opening price and closing price of a contract.
What makes CFD unique is you never really own the particular asset or instrument you have chosen to trade, but you can still benefit if the market moves in your direction.
You can use CFDs to wager on the future engagements of market prices irrespective of whether the principal markets are increasing or dropping. For experienced, frequent traders that use a brokers including CMC Markets, CFDs are an increasingly popular alternative to spread betting.CFDs are synonymous to spread betting; you can stake on stock price engagements devoid of having to truly own the shares.
The major difference is spread betting is free from capital gains tax since it is considered a form of gambling, but CFDs are only free from stamp duty. Both can be closed out at any time.
The Way CFD Trading Works
You can potentially profit from a market moving either up or down. Going long means you believe an asset’s price is going to rise so you open a buy position for it. You open a sell position if you believe an asset’s price is going to fall, which is referred to as going short. The actual performance of the market governs whether you make profit or loss, and also how much.
For example, you think a certain market will rise so you buy a CFD to trade. Your profit will be considerably higher the more the market upsurges, and your losses higher the more the market falls, and vice versa.Features of CFD Trading
Hedge Your Portfolio
You may apply CFDs to offset the loss by short selling if you think your current portfolio may decline in value. Many investors use CFDs to hedge their portfolio, especially in volatile markets.
You can use any losses you incur to offset against your Capital Gains Tax liabilities. Therefore, CFDs can be extremely tax efficient.
Trade on Leverage
CFDs are traded on control, meaning you pay only a certain fraction of the entire trade value to open your position instead of paying for it in full. Leverage can be used to amplify return on investment as full trade exposure is much more than the initial deposit for trade. However, losses are magnified in the exact same way if the market moves against your trade which can result in losses beyond your initial expense.
Wide Range of Markets
CFDs are applicable to thousands of individual markets including shares, commodities, indices, currencies, sectors and interest rates. CFDs can be used get instant exposure to all major global markets including US, UK, Europe, New Zealand, Australia and Asia.
No Stamp Duty
CFDs are a derivative product, thus, you don’t actually own the underlying instrument. This entails you won’t have to pay stamp duty, giving you an opportunity to save 0.5% on the value of each trade.
Advantages of CFDs
You don’t have to pay stamp duty and throughout the span of the CFD, you are eligible to any bonuses paid or stock splits distributed by the company whose shares you’re purchasing.You can trade on numerous stock indices, such as the FTSE 100, including a variety of currency exchange rates.
Most CFD trades don’t expire. When you want to close out a position, you simply put a trade identical in value in the opposite direction.
Main Reasons for Trading CFDs
CFD has plenty of brokers who are eager to provide you with a lot of benefits, more than there are for other types of trading. The first reason for trading with CFD is the direct market access, allowing you to trade directly into the underlying order book of equity exchanges throughout the world.You have access to a wide range of markets, particularly options, shares and interest rates. By sheer virtue that you don’t own the underlying market, you can trade on markets that would otherwise be untradeable, for example, cash index products.
CFD trading can be unlimited, meaning you can access trading opportunities 24/7 with different brokers. It offers round-the-clock trading.
The main risk with CFDs is the market risk. If the market moves against you, the value of your position will reduce.