5 Advantages of Trading CFD That You Cannot Ignore

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The difference between where a trade is entered and exited is the contract for difference (CFD). A CFD is a tradable instrument that mirrors the movements of the asset underlying it. It allows for profits or losses to be realized when the underlying asset moves in relation to the position taken, but the actual underlying asset is never owned. Essentially, it is a contract between the client and broker. Trading CFDs have several major advantages, and these have increased the popularity of the instruments over the last several years.
Before delving to describe advantages of CFD, it would be proper to discuss how it works. If a stock has an ask price of $25.26 and 100 shares are bought at this price, the cost of the transaction is $2,526. With a traditional broker, using a 50% margin, the trade would require at least a $1,263 cash outlay from the trader. With a CFD broker, often only a 5% margin is required, so that this trade can be entered for a cash outlay of only $126.30.
Trading CFD
Higher Leverage
CFDs provide much higher leverage than traditional trading. Standard leverage in the CFD market begins as low as a 2% margin requirement. Depending on the underlying asset (shares for example), margin requirements may go up to 20%. Lower margin requirements mean less capital outlay for the trader/investor, and greater potential returns. However, increased leverage can also magnify losses.
Global Market Access from One Platform
Most CFD brokers offer products in all the world’s major markets. This means traders can easily trade any market while that market is open from their broker’s platform.
No Shorting Rules or Borrowing Stock. Certain markets have rules that prohibit shorting at certain times, require the trader to borrow the instrument before shorting or have different margin requirements for shorting as opposed to being long. The CFD market generally does not have short selling rules. An instrument can be shorted at any time, and since there is no ownership of the actual underlying asset, there is no borrowing or shorting cost.
day trade
Professional Execution with No Fees
CFD brokers offer many of the same order types as traditional brokers. These include stops, limits and contingent orders such as “One Cancels the Other” and “If Done”. Some brokers even offer guaranteed stops. Brokers that guarantee stops either charge a fee for this service or attain revenue in some other way.
Very few, if any, fees are charged for trading a CFD. Many brokers do not charge commissions or fees of any kind to enter or exit a trade. Rather, the broker makes money by making the trader pay the spread. To buy, a trader must pay the ask price, and to sell/short, the trader must take the bid price. Depending on the volatility of the underlying asset, this spread may be small or large, although it is almost always a fixed spread.
No Day Trading Requirements
Certain markets require minimum amounts of capital to day trade, or place limits on the amount of day trades that can be made within certain accounts. The CFD market is not bound by these restrictions, and traders can day trade if they wish. Accounts can often be opened for as little as $1,000, although $2,000 and $5,000 are also common minimum deposit requirements. There are variety of trading options available. There are stock, index, treasury, currency and commodity CFDs; even sector CFDs have emerged. Thus, not only stock traders’ benefit – traders of many different financial vehicles can look to the CFD as an alternative.
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