More and more people are now becoming financially literate because information about how to save and grow money is already easily available and accessible online. While some are keen on investing in the stock market, others are delving into more contemporary means such as cryptocurrencies and unique financial contracts known as “contract for differences” (CFD). In terms of the latter, here are more than a few good reasons why you may also want to consider growing your money through CFDs:
One of the primary reasons why you should start trading with CFDs is that it can be quite easy for you to begin doing so. The reason behind this is that you don’t need much to start trading with CFDs apart from a brokerage account. Just keep in mind to only engage with reputable ones because in doing so, you will be guaranteed your safety and security online when it comes to your sensitive information. Alongside this, you should also be keen on being updated with what is in the news because in doing so, you will be more informed, putting yourself in a better position to trade; as such, a brokerage account and sufficient knowledge are the only things you need to get you started.
Tax Efficiency and Lower Transaction Costs
Another reason why you should consider trading with CFDs is tax efficiency, particularly because CFD trading is free from foreign stamp duties. Just keep in mind that these tax laws are subject to change. In parallel to this though, CFD trading also offers lower transaction costs because CFDs allow you to gain exposure without having to buy the actual share. This can be attributed to the fact that CFD is a contract between two parties to exchange the difference in the price of a share. This means that when you buy a CFD, what you own is a contract over the movement in the share price. The share price tends to be re-valued in real-time. In this case, if the CFD decreased in value, then you must pay the difference. Nevertheless, for several CFD providers, the commission costs are relatively low
High Profit Opportunity in Falling Markets
With CFD trading, you have the opportunity to take profit from falling markets. This can be attributed to the fact that you never own the underlying market, allowing you to go short or long as you deem fit. For instance, if you open a short CFD position, you will sell the number of contracts that you have chosen rather than buying them. As soon as you close your trade, you will need to buy the same number of CFDs. In doing so, you will gain a certain amount of profit when the market prices fall.
Capital Growth with Leverage
There is a great chance for you to grow your capital when you trade CFDs because of leverage. In this case, to open a position, you only need to deposit a fraction of your trade’s value, which can be as small as one percent of the value of what is being traded. With leverage, you can magnify your profit from your capital to sometimes even a hundred times. For instance, with $1000, you can get a $100,000 exposure to the market.
If you want to hedge your investments in securities, then trading with CFDs is one of your most viable options. The reason behind this is that with CFD trading, you can either buy or sell the CFD asset you are holding to balance out the losses that you may experience from its price movement. In this case, you also have the option to either fully or partially hedge to protect your investment from significant losses. To do this, you need to employ the funding you obtained on margin.
With CFD trading, you will be exposed to shorting opportunities that you can use to your advantage. In this case, you can short a considerable volume of a particular security on margin in an attempt to make a profit on failing markets, indexes, and companies. You can also short to hedge a long position. For instance, you may be holding a long position on Google but you are worried that their next announcement about their earnings will fail to meet expectations. In this case, shorting will prove to be a wise decision. For these reasons, it is a good idea to consider trading with CFDs.
Ability to Trade on Margin
With leverage, you can magnify your investment return. However, you can expand your profit even more by using the available margin on your account. This will prove to be advantageous for short-selling operations. However, you need to ensure that you fully understand the terms and conditions of your margin account to make sure that your positions are well funded. In this way, you will be able to avoid a margin call. Just keep in mind that while you will be able to increase your profit by trading on margin, you are also increasing the chances of magnifying your losses, which means that you need to exert extra precaution with this strategy.
Alternative to Futures
Finally, you should consider trading CFDs because it is a viable alternative to futures or financial contracts that obligates holders to either buy or sell a certain asset at a predetermined price. However, futures are not usually accessible to small traders. This is where CFDs can come in because you can hold them for as long as you want.
There are various reasons why you should consider growing your money through CFDs. For one, it is quite easy, to begin with. Aside from this, you also get to benefit from tax efficiency or take profit from falling markets. You will also have the opportunity to grow your capital with leverage or grab your opportunity to hedge. Trading with CFDs will also pave the way for shorting opportunities, as well as margin trading. CFDs are also a good alternative to futures. All these are viable reasons for you to consider trading with CFDs.
Photo Credit: pixabay