Benefits Of CFD Trading: Why Trading CFDs?

Are you looking for a way to enter the trading world without owning the underlying assets? 

Then Contract for Difference (CFD) trading could be the answer you've been searching for!  Not only does CFD trading provide access to a wide range of markets, but it also offers plenty of benefits that traditional trading methods cannot match. 

In this guide, we'll explore the top benefits of CFD trading and why you should trade CFDs. So, let's dive in!

If you're new to the trading world, you may have heard of CFDs but aren't quite sure what they are. 

Put simply, a Contract for Difference (CFD) is a financial contract between a buyer and a seller that enables the buyer to profit from the difference between an asset's opening and closing price without owning the underlying asset. 

In other words, CFDs allow you to speculate on the price movements of forex pairs, stocks, commodities, cryptos, and other financial instruments, without needing to buy them physically.

To give you an example of how CFD trading works, let's say you think the price of gold will increase from $1629 to $1750 in the coming weeks.

Instead of buying physical gold, you could open a CFD position on the price of gold, speculating that the value will go up. If gold prices rise to $1750, you could sell your CFD position and profit from the difference between the opening and closing prices.

CFD gold trading

Here's a fun fact: CFDs were first introduced in the UK in the early 1990s as a way for institutional traders to hedge their positions. However, it wasn't until the early 2000s that retail traders began to take notice of the benefits of CFD trading. 

Now that you know what CFDs are, let's examine why people trade CFDs. Here are the top 5 reasons: 

All in one 

One of the unique benefit of CFD trading is the convenience and flexibility it offers. With CFDs, traders have access to a wide range of markets, including forex, stocks, indices, commodities, and even cryptocurrencies. 

And the best part? 

You can trade all of these markets via one platform without needing multiple accounts or complex trading systems. This all-in-one approach particularly appeals to traders who want to diversify their portfolios and take advantage of multiple market opportunities.

For example, you could open a CFD position on the price of gold while also trading the stock market and forex pairs, all from the same platform. This allows you to explore different markets and find the opportunities that best fit your trading style and goals.

Volatility 

In financial markets, volatility refers to the amount of fluctuation in the price of an asset. High volatility means the price moves around a lot, while low volatility means the price is relatively stable. 

Did you know that the term "volatility" originated from the Latin word "volatilis," which means "fleeting" or "flying"? This is because volatile assets tend to have rapid and unpredictable price movements, similar to the flight of a bird.

Trading CFDs with volatility can provide traders with higher profit potential. This is because when an asset is more volatile, there is a greater chance that its price will move significantly in a short period. 

For example, if you had bought a CFD on Bitcoin in 2020, trading at around $10,000, and sold it when it hit its all-time high of $64,000 in 2021, you would have made some serious dough.

No one talks about volatility because it adds the thrill of trading CFDs. Let's face it, trading can be pretty dull sometimes, especially when markets are flat, and there isn't much movement. 

But when volatility is high, things can get pretty interesting. You need to be on your toes, ready to react quickly to sudden price movements, and that can make for a more engaging CFD trading experience.

>>Read more: Strategies for Trading Volatility With CFDs

Liquidity

Liquidity refers to the ease with which you can buy or sell an asset without affecting its price. In other words, an asset with high liquidity can be bought or sold quickly and at a fair bid/ask spread. 

CFD trading offers high liquidity, meaning you can buy and sell positions anytime, with tighter bid/ask spreads. High liquidity also means that your trades will be executed faster. When you order to buy or sell a CFD, it will be filled quickly and efficiently without any slippage or delays.

For instance, if you notice that the price of GBP/USD has suddenly dropped and you want to catch the ride, you could open a short position on a GBP/USD CFD and potentially make a profit if the value continues to dip. 

Also, trading CFDs with high liquidity makes you less likely to experience sudden price swings or volatility. This can help you manage your risk more effectively and avoid unexpected losses.

Go long and Short 

When you trade CFDs, you can go long or short on an asset. Going long means you expect the asset to increase in value while going short means you expect it to decrease in value. 

For example, if you think the US stock market will increase in value, you could open a long position on S&P 500. 

With the high liquidity of CFDs, trading both long and short positions can also be used as a hedging strategy. For instance, if you hold a long position on EUR/USD and the market turns bearish, you can open a short position to offset your losses. This can help protect you from potential losses and reduce risk.

Leverage

In CFD trading, leverage allows you to gain exposure to any market with small capital. It magnifies your trading positions with a small upfront cost. 

One of the benefits of trading CFDs with leverage is the potential for higher returns. Leverage allows you to increase the size of their position relative to their account balance. 

So, if you have a $1,000 account and use 10:1 leverage, you can open a position worth $10,000. If the market moves in your favor, you will profit based on the full $10,000 position size rather than just their original $1,000.

Of course, higher returns also come with higher risks. Leverage is a double-edged sword and amplifies both profits and losses.

Another benefit of trading CFDs with leverage is accessing markets that would otherwise be difficult to invest in. 

For example, a retail investor may not have enough capital to buy physical gold, but they could trade a CFD on the price of gold with leverage. This allows traders to participate in a wider range of markets and potentially diversify their portfolios.

Lower Costs

Did you know that one of the biggest advantages of trading CFDs is that they can come with lower costs than other forms of trading? 

First, when trading CFDs, you don't own the underlying asset - you're speculating on the asset's price movements. This means you don't have to pay the full asset cost upfront. 

Instead, you only need to put down a fraction of the total value of the trade - this is known as margin trading, and it is related to leverage trading. 

Imagine you want to buy company shares but only have $500 to invest. You can only buy ten shares if the shares cost $50.

However, if you were to trade CFDs on the same company, you could potentially control a much larger amount of shares with the same amount of money, thanks to the margin trading feature.

Another cost advantage of trading CFDs is that you don't have to pay certain fees associated with traditional trading. 

For instance, there are plenty of brokers which provide no-commission trading. Also, you can avoid certain taxes, which generally apply to traditional stock or commodities trading.

In the previous part, we mentioned some of the benefits of trading CFDs, but are they enough to make a decision? 

Here are some things to consider:

• CFDs allow you to trade on margin, which means you can control a larger amount of the underlying asset with a smaller amount of capital. This can magnify your potential profits, but it can also magnify your potential losses.

• Another thing to consider is the fees associated with trading CFDs. These can vary depending on your broker, including spreads, overnight charges, and commission fees. 

• CFDs are a complex financial instrument and may not be suitable if you are just entering the trading world.

Ultimately, it depends on your goals, risk tolerance, and trading experience. If you are an experienced trader who understands the risks and potential rewards of CFD trading and has a solid trading strategy, then it may be worth considering.

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