CFD or the contract for difference is a tradable instrument which reflects the movements of the assets underlying it, while the actual underlying asset is not owned. So it is a contract between the client and the broker and it has some important advantages. These benefits made CFDs very popular over the last years and every interested trader should know them.
Use capital efficiently. CFD trading is high leveraged, so you can increase your exposure from an underlying asset from the same investment in the beginning. To start a CFD trade, you just have to deposit a part of the total trade value. So if the market moves in the direction expected by you, leverage brings you profit, but in the same time, there is a high degree of risk if the market moves against your expectation.
Don’t have to pay stamp duties. This is a great benefit of CFD trading, regarding that you don’t need to pay safekeeping fees or stamp duties because you don’t purchase anything. At the same time, you will not have any shareholder voting rights.
Make profit when market falls as well as rise. Since you are trading on the price movement of a financial instrument without actually owning it, you can make profit from falling or raising markets. It all depends on what are your expectations. So it is as easy to buy a CFD as it is to sell it. When the market rises, the trader will go long, which means he will look to buy a CFD position first and to sell it later, closing out his position. When the market falls, traders go short, so they sell a CFD position and buy it back later, to close their position.
Access to a wide range of markets. CFD allows you to trade financial markets around the world, that are not available to retail investors. So you have several options, as trading on the price movements of commodities like oil, gold or silver or trading on individual equities.
Hedge other investments. CFDs can be used as an insurance against price falls in a given portfolio, as this instrument allows you to go short or to go long. So if you have a long-term portfolio, but there are some short-term risks you think can affect it, you can use the contract for difference to reduce short-term losses by hedging your position. When the value of your portfolio decreases, the profit in the CFD will compensate those losses.