CFD trading is a type of derivatives trading that allows you to speculate on financial instruments’ rising or falling prices. Contracts for difference (CFDs) are traded on margin, meaning you only need to put down a small deposit – or margin – to open a position. This makes CFDs an attractive proposition for many traders as you can get exposure to a much more prominent position than you could with your actual investment.
CFDs were initially designed for the professional trading market but have since become available to retail traders. CFD trading is now offered by many online brokerages, making it easy for anyone to get started.
CFDs are traded on margin: This means you only need to put down a small deposit to open a position. This allows you to get exposure to a more significant position than you could with your actual investment. For example, if you wanted to buy $10,000 worth of gold, you would need to put down $1,000 as a margin.
Leverage in CFD trading: Leverage is when you use borrowed money to trade. For example, if you have a $1,000 account and you use the leverage of 10:1, you can trade up to $10,000 worth of CFDs. This means that for every dollar you have in your account, you can trade $10 worth of CFDs.
Leverage can help you make bigger profits, but it can also magnify your losses. This is why it’s vital to understand how to use leverage responsibly before you start trading.
You can trade CFDs online 24 hours a day, five days a week: You are effectively trading against the broker when you trade CFDs. You buy and sell contracts for difference rather than actual shares. The broker will always quote two prices: bid and ask prices. The bid price is the price at which you can sell the CFD, and the asking price is the price at which you can buy it.
You can trade CFDs on a wide range of financial instruments: CFDs are available on various financial instruments, including shares, indices, commodities, currencies, and treasuries. This means that you can trade CFDs on almost anything traded on the financial markets.
You can short sell with CFDs: When you short sell, you sell a CFD with the hope that the price will fall so that you can repurchase it at a lower price and make a profit. Short selling is not possible with traditional investments such as shares but with CFDs.
You don’t have to pay stamp duty on CFD trades: When you buy shares in the UK, you have to pay a stamp duty of 0.5%. However, you don’t have to pay stamp duty on CFD trades. This is because CFDs are classed as derivative products.
You can trade CFDs in a tax-free environment: If you trade CFDs through an online broker based in the UK, your profits will be exempt from capital gains tax. This is because CFDs are classed as financial spread betting.
You can use CFDs to hedge your portfolio: Hedging is when you take out a position in a CFD that offsets any potential losses in your existing portfolio. For example, if you own shares in ABC plc and are worried about a fall in the share price, you could hedge your position by taking a short CFD position. This would offset any potential losses in your ABC plc shares if the share price fell.
CFD trading is not for everyone, and it is crucial to understand the risks involved. CFD trading may not be suitable for everyone. You could lose all of your investment, so make sure you comprehend the risks before you start trading.
