Are you interested in trading CFD but doubtful because of the risks it constitutes?
Trading is about risks and counter-measures to minimize the effects of the
risk. Moreover, there are a lot of advantages linked to CFD trading. It is also
better to know these things rather than dwelling on the negative side of them.
Advantages of CFD Trading
Trade With Rising or Falling Markets
With CFD trading, you can benefit from the
price movement not just if it goes up but also if it goes down. You can either
take a buy position or a sell position, meaning, you can benefit from either of
these market movements.
Maximize the Use of Leverage
Another great advantage of CFD is its
marginal trading. Instead of putting the entire value of a huge position, you
are only required to pay a minimum percentage of the trading position. This is
called the initial margin. When you trade on margin, maximizing profits is
highly possible. But then, it could also magnify your losses. Trading on margin
without proper plan and execution will only result in blowing up your entire
investment and trading account in case the trade goes against your plans. For
professional clients, they can actually lose more. They may even have to
deposit more funds to cover their losses.
Understanding Diversification and Hedging
In CFD trading, you will have to
incorporate hedging and diversification into your profile, most importantly in
volatile markets. This way is very effective in expanding your trading
opportunities, diversifying your portfolio, low margin requirements, and even
the trading costs that are associated with CFD trading.
No Stamp Duty Required
Since you don’t really own the underlying
asset in CFD, you don’t have the obligation to pay the stamp duty. But
depending on the circumstances, these tax laws might change or they are subject
to change from time to time. Certain jurisdictions have different tax laws. You
need to ask the assistance of financial advisers over this matter.
Availability of a Number of Markets
Trading
CFD is open to a variety of markets. You can trade Indices, Currency,
Commodities, and others no matter where you are – US, Asia, Europe and so much
more.
Low Trading Costs
Aside from the low spreads and margins in
CFD, the trading costs are also much lower depending on the financial
instrument that you choose to trade. The length of time when holding the
position open also affects the trading costs.
Risk Management
Risk management is very important in
trading, no matter if it's CFD, Forex trading, or any other means of
investment. Risk management does not entirely eliminate the risks since risks
and trading are married together. But when you use risk management on your
trades, you can minimize the losses you incur on your trades. In CFD, you can
use Stop Loss or Take Profit when you exit an order. This order works just fine
even if you are not looking at it at all times. Additionally, you can use Stop
Entry and Limit Orders if you want to enter the market at a desirable level.
