A contract for difference (CFD), is essentially a way for traders to gain exposure to the price movement of stocks on the global market. Traders can speculate on the price of an asset without actually owning it.
By having the flexibility to buy or sell an asset depending on its performance in a rising or falling market, you’ll be able to maximise your potential to profit from your position.
Join us as we look at the benefits of trading stock CFDs, so that you can make an informed decision about how best to take your place on the market, based on your trading strategy.
Benefits of trading CFDs
Perhaps one of the most important benefits of trading CFDs is that you can speculate on multiple financial markets, all in one place. There are a variety of assets you can trade as CFDs. These include: shares, commodities, foreign exchange (forex), indices and Exchange Traded Funds (ETFs).
As well as providing you with the ability to assume long and short positions on the market, taking advantage of its liquidity, there are many other benefits. For example:
The use of leverage will help to make your capital go further. This is because you only have to deposit a percentage of the trade’s total value in order to open a position, borrowing the remaining capital from a broker. This is known as a margin. For example, with a leverage of 1:10, the initial margin requirement for this stock CFD is 10%, and you’ll receive 10 times the amount of capital you put towards the trade.
Whilst this lowers the cost of opening the trade, and offers the potential for amplified gains, the use of leverage can also amplify your losses. It is important to remember, like with any type of trading, that there is always some risk involved.
- No stamp duty
If you’re already familiar with the stock market, you’ll know that most UK shares require you to pay stamp duty. When trading CFD stocks, you don’t have any ownership of the underlying assets, so will not be required to pay any stamp duty.
- No ownership
As mentioned above, not only does not owning the underlying assets removes the requirement for paying stamp duty, but it also allows you to speculate on market movements with more flexibility, so you can buy and sell quickly and accordingly.
- Access to global markets
Trading CFDs provides you will access to many global markets, without being required to purchase the contract in any other currency, making it easier to diversify your portfolio. In simpler terms, this means that all assets are available to you in your own currency, around the clock. Remember you may still have to pay a currency conversion fee, so that’s something worth checking before taking out a trade.
Understanding stock CFDs
With all these benefits in mind, you’ll see that CFD stock trading allows you to gain greater exposure to the underlying asset, but with less capital, and can be a great way to take your place on the market.
CFDs are reflective of the underlying market, and so shares in the stock market and CFDs are traded in much the same way. One share CFD, also known as a unit, is equivalent to one share on the stock market, as the price of a CFD is derived from that.
Trading stock CFDs allows you to access shares from several markets across the globe, quickly and efficiently, opening and closing positions at rates that suit you. It is also much faster than opening a traditional brokerage account.
Overall, CFD trading is generally recommended for short-term trading, due to the nature of the ever-changing market, since it will provide you with the ability to efficiently open a buy position if you think the price will go up, or sell a position if you suspect the price will go down.