- Speculation. As CFD traders typically hold positions for a short time span you are not typing up your cash which means that when you see a trading opportunity you will have sufficient funds in your account to take the trade.
- The commission rates on share CFDs are typically much less than on traditional share dealing which means that you can trade more actively for smaller price movements making CFDs extremely cost effective for day traders.
- Small moves can also be magnified further using leverage. If you bought 250 Apple shares at $242 you would normally have to spend $60,500. If you then decided to sell Apple shares at $249 you would make a gain of $1750 which amounts to 2.89%. If you had bought 250 Apple CFD contracts for $6050 (margin of 10%), assuming you had sold at $249 you would still have made an equivalent gain of $1750. The difference is that in real percentage terms your return on investment has gone up to 28.93%.
- Profit from a falling market. CFDs allow you to profit from a stock or index that is falling in value. No longer do you have to sit and wait for the market to recover, as the market retracements offer opportunities on the short side as well as the long side.
- There is no settlement period when closing a CFD position – meaning an investor can buy and sell positions instantaneously.
- Pairs Trading, a short-term trading strategy which can be very effective to trade two companies whose share prices are currently out-of-sync from their ‘usual’ correlation. Here, you would be looking at similar stocks within specific sectors, for example Shell and BP. CFDs are used by ‘going long’ on the perceived undervalued share whilst ‘going short’ on the perceived overvalued share.
- You can also use CFD trades to hedge against a physical shares exposure in your portfolio. This is because in some cases it can be more cost effective to open a short CFD trade as opposed to selling the physical shares – only then to buy them back at a later date.
- If you have a number of shares that do not fluctuate much but pay a constant dividend and constitute long-term investments, then you could use leverage to trade these companies using a dividend stripping strategy where you buy the shares the day before a company goes ex dividend and sell on the ex dividend date in expectation of the share price falling less than the dividend payout.
- Contracts for difference can be traded on thousands of diverse instruments ranging from shares and foreign exchange to indices, commodities, options and more. You can trade almost any market in the world and with so many instruments at your fingertips you can be certain that there will be a time that works in with your schedule.
- Contracts for Difference (CFDs) are relatively easy to learn and much less complicated to trade than options or warrants.
- If you do not hold your CFD position open overnight you will not incur any financing charges. And when you trade CFDs short, you receive interest payments for every day that you hold a position open.
- As CFDs are marked to market every day, when you have a winning position your account size grows daily. Unlike stocks, you do not have to sell out of your winning position in order to benefit from the increased price.
- As you are only holding your positions for a short time-frame you are not locking up your cash, which means that when you see a trading opportunity you will have sufficient funds in your account to place the trade.
- With the way that a margin call operates, if you happen to have a losing position you are required to meet the losses as you go along. This means that you never get stuck suddenly facing a large bill for the total amount you lost.
- Because of margin calls, if you have a losing position you cannot ignore it, as you can with shares. One of the failings of traders is the difficulty in “cutting their losses”, as many traders will hang on in hope that a losing situation will turn around. CFDs enforce a discipline of reviewing trades that do not seem to be working.
- CFDs are exempt from stamp duty in the UK, as you never actually buy or sell the shares which makes CFDs ideal for trading in the short to medium term markets.
- Compared to futures, the minimum contract size is small, meaning a minimal amount of money is needed to trade in them.
- If you are using CFDs to trade on an intraday basis you will not incur any financing charges (assuming you don’t hold a position open overnight). Additionally, here you are reducing the risk as you are not exposing yourself to the possibility of a share CFD gapping up or down overnight as a result of global market movements.
- There is no expiration date, avoiding the complications that arise from this when trading futures or options.
- As CFDs count for capital gains tax, any losses can be offset against other capital gains.
- If you want to sell your shares to realize a capital loss for tax purposes but want to keep a position in them, you can use CFDs. If you sell shares and then buy back straightaway, the regulations deem that you have not effectively sold. But if you sell shares and take a CFD position you will still realize any gains in the shares. After 30 days, you can buy the shares back. The result of this is that you can control the time by which your gains or losses are realised.
Reasons for Trading CFDs
