Contract-for-difference trading is gradually becoming a common alternative to conventional investing and understandably so because it can help you make the most out of capital investments and ultimately increase your profits.
Of course, CFD trading comes with its shortcomings but given the rate at which it is gaining popularity, it is safe to assume that it is worth getting into.
If you have not joined the bandwagon, here are some of the reasons why you should.
Better Trade Leverage
With conventional investments, investors are required to commit all their capital in a trade whenever they want to open a position. Think stocks and how they are bought. For instance, if you want $5,000 of stock, you will have to commit the entire amount in the investment.
With CFD trading, however, you will only need a 5% margin to open a position. Seeing as you require less capital, you get to increase your probable profit margin.
For example, if you intend to open a $2,000 position in a forex pair, you only need to commit 50% to the investment. The remaining $1500 is available for you to allocate to other positions.
While this approach sets the stage for bigger losses, negative balance protection counters some of that risk. Subsequently, this builds a net positive when you want to maximize potential gains using leverage.
Profit Potential in Bull and Bear Markets
CFD trading enables you as an investor to open positions in falling and rising markets alike and this allows you to make the most of any kind of market fluctuation.
With more flexibility when it comes to chasing opportunities, you get to enjoy better control over when, where, and how you open positions in the market.
Flexible Lot Sizes
CFD positions are volatile, and because of that, most brokers offer flexibility in terms of trade size. In so doing, brokerages can accommodate a broad range of investors particularly casual traders and beginners who want to try investment strategies without risking it all.
You can increase your lot sizes as you gradually gain confidence in your trading tactic.
Reduced Trading Costs
One of the things you will probably love most about CFDs is that they tend to come with lower brokerage fees compared to conventional trading methods. Brokerages usually get their earnings from the percentages earned from financing transactions.
For instance, when you spend $100 to open a $2,000, the brokerage charges a fee to cover the difference.
Moreover, investors usually pay for positions when they opt to sell. In that regard, you always want to check out a broker’s fee structure before opening an account and beginning to trade. It is necessary to know how much it will cost you to trade.
Wider Hedging Options
Owing to the restricted capital commitment required to open a position, investors have access to capital that can be used to execute hedged positions and control their risk at any given time.
This is a particularly valuable strategy when you take chances on a CFD, or when a long-standing position is amassing losses.
Rather than sell at a loss and drain your account, you can open more positions in a bid to get profits that will balance out your original position.
A hedging tactic can balance out a portion of CFD risks when used accurately.
Non-Existent Expiration Date
One of the best things about CFDs is that their value does not depreciate over time. Besides, they do not have expiration dates and they come with fewer restrictions when it comes to closing positions compared to other kinds of investments.
To that effect, you need to be persevering after taking long positions. If you are a day trader, you may not notice many benefits but if you can take a long-term approach to your investment, you get to navigate the market through different cycles and wait until it is the right time to sell.
CFDs come with several unique and potentially profitable benefits to investors but because of those same potential rewards, the investments present a significant risk. As such, you need to be careful before opening a position.
To make the most out of this investment strategy, you need to follow the best CFD trading practices. This includes exercising caution when allocating capital to CFD trades and thoroughly researching investments.
All in all, CFD trading is a worthwhile venture.