CFDs, or Contracts for Difference, are a financial instrument that allows traders to gain exposure from the price movement of an asset without being directly involved in its ownership.
A contract for difference only requires a margin account that several brokers offer free of charge. You don’t have to pay any commissions or fees to open this type of investment account. A CFD works by allowing you to trade assets without having possession of them until the settlement date – which means they can be used as part of your strategy.
What are Contracts for Difference?
A contract for difference is an agreement between two parties regarding the buying price of an asset and the selling price. You can buy an asset at a lower rate than you sell it, creating a profit. It’s beneficial when trading with large shares due to the relatively small difference in costs between buying and selling on most markets.
Types of CFDs
There are two types of CFDs: ‘buy’ and ‘sell’. In a buy position, the trader believes the value of an asset will rise in future and so wishes to take a long position. Conversely, if traders feel that an asset’s value will fall, they can take a short position.
In both positions, though, traders don’t need to invest in the underlying assets themselves; instead, they speculate on the direction of prices. Investors can enjoy potential returns from either increasing or decreasing share prices without trading shares.
Benefits of using CFDs in your trading strategy
Easy to buy and sell shares
First and foremost, you can buy and sell shares without actually owning them—this makes for much quicker entry and exit points than traditional buying/selling methods. Also, there is no need to wait for the dividends as their value will be reflected instantly in the instrument’s price.
No stamp duty on transactions
In addition, unlike actual shares where traders have to pay stamp duty on transactions, those that trade with CFDs doesn’t. It saves a great deal of money that could be better invested elsewhere.
No substantial up-front payments are required.
Investors do not have to make a substantial up-front payment either because they only have to put down a percentage of the potential loss or gain as a margin requirement.
Smaller transaction fees
Another benefit of using CFDs over simply purchasing shares is that you enjoy more flexibility, but you also benefit from smaller transaction fees. For example, buying 100 shares of Apple will set you back $60, whereas you can enjoy the same returns with just one CFD at the cost of only $4.
CFD trading is perfect for those looking to make quick returns on the price movements of an instrument. The high leverage offered by CFDs not only lets you profit but also lets you lose your investment should the market take a sharp turn against you.
Take advantage of market volatility.
When speculating on the price movement of an asset, traders are essentially trading on margin, which means that they can take advantage of small fluctuations in prices due to market volatility. It also makes it possible for traders to profit even if there is no change in price as long as there is enough liquidity and demand.
For example, with stock CFDs, a trader might purchase a contract at $60 and then sell at $60.01, even though the value of the underlying share didn’t actually move (and thus without necessarily profiting from any changes in share values).
The benefits of using CFDs as a trading strategy are clear to see; not only is it possible for traders to enjoy more significant profits than traditional investment strategies. They’re also able to do so without having to worry about paying expensive transaction fees. It’s easy to get started too, all that’s required is an online saxo broker and an account with the world’s leading CFD provider.