Four reasons for investors to consider trading in CFDs

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Updated: 04 March 2020

Traditional investors, such as those who buy into stocks, will have noticed the boom occurring in the CFD industry. The CFD market is currently attracting many new traders, some of whom have never traded before and others who are moving from another market.

For those who have invested or currently invest in stocks, your best entry into the world of trading could very well be to learn how to trade CFDs. With the number of advantages that trading in contracts-for-differences (CFDs) offers traders, investors should consider this method one of the best options available. Beyond the fact that investors can still make use of their stock market knowledge and understanding, here are four more reasons this could be the trading method for you.

  1. CFDs are more cost-effective

The key difference between normal market trading and CFDs is that you do not own the underlying stock or share. If you were to buy shares, a number of additional fees would apply, making the process expensive. In South Africa, for example, these include stamp duty, State and securities transfer tax fees. Other countries have their own additional charges for purchasing stocks. With CFDs, however, none of these costs are added to your trades. This means investments can be made with what could generally be seen as a negligible cost. As a result, the brokerage for trading in CFDs also works out to be more affordable than when investing, and you might even find a broker who charges a fee of 0.5% or less.

  1. Money multiplying function

CFDs are geared toward multiplying the price movements of the underlying share. This allows your potential profits to increase significantly. If you were to trade with a gearing of five, for example, you could ultimately profit from the movement of five shares rather than one. However, it is vital to note that this also counts for losses, which can be increased for the same reason. Therefore, as with many other markets, risk management is crucial to protect your finances when trading in CFDs.

  1. A drop in the price share does not automatically result in a loss

When you buy CFDs, you place a long position on your trade, particularly when the price of a share begins to rise. The added benefit of CFD trading is that if the share price begins to fall, you can short it and sell. This way, if the price continues to fall, you will make profits from it. This concept works in the same way as if you were dealing with shares directly. You would sell the shares before the price drops and then buy them back at a cheaper price, allowing you to make a profit.

  1. CFDs do not expire

Many other markets work on a system where trading instruments, such as single stock futures, have an expiration date whereby they must be traded. This affords CFD traders the advantage of having no pressure when it comes to automatic closing of trades once it reaches a certain date. There are still various details like holding costs and suspension to keep in mind. However, the stress of expiry is removed. This makes for calmer and more strategic trades as opposed to trading in a hurry to meet the due date as you might with stocks or other instruments.

There is no form of trading that is easy or guarantees profits, and CFDs are no exception. However, investors will find that CFDs offer a smooth transition from the investment industry that can prove highly profitable when approached correctly.

These four reasons are only one part of all this market entails; there are many other benefits. The best way to get started for those who are interested would be to conduct extensive research, shop around for a reliable and affordable broker, and make use of free demo accounts to test the procedure before trading on a live account.