When it comes to CFD [contract for differences] trading, many people are still hesitant about venturing into it because of a lack of adequate knowledge of this investment. For a start, a contract for difference is typically a contract between a purchaser and a vendor stating that the purchaser needs to pay the vendor or merchant the variance between the current value of an asset and its future value when the contract ends.
It is worth mentioning that the value of a CFD doesn’t take into consideration the assets’ fundamental value: it is only the price that changes between the trade entry and its exit.
There are reasons that have made CFDs gain massive popularity across the globe. That’s because they offer incredible benefits, making them worth it. In this article, we take a look at some of the essential reasons why you should venture into CFD trading. Without wasting more time, let’s delve into them.
⦁ Higher leverage in trades
It is no secret that CFDs tend to offer greater leverage as opposed to traditional trading. When it comes to traditional trading, a trader needs to commit 100% capital to trade for them to open a position. For traders who wish to purchase stocks, they have to commit all their capital in the investment.
Thankfully, this is not the case with CFDs because the current margin needed to open a position is only 5%. With this less capital, traders can significantly boost their profit margin. What it means is that lower margin requirements translate to reduced amount of capital expense for the trader and higher potential returns. But it’s worth mentioning that increased leverage may also increase a trader’s losses. However, negative balance protection can eliminate these risks.
⦁ Flexible lot sizes
Since CFD positions are quite unstable, many brokers tend to offer flexible options concerning trade size. This way, brokers are able to take in several traders, particularly beginners and even casual traders who want to experiment with investment strategies.
Even though lot sizes may be limited by your particular forex platform as well as the trades you want to perform, CFD trading usually enables more flexible lot sizes because traders can balance the amount of money they want to use with the amount of money they are willing to risk.
New traders should start with a small lot size to reduce their risks. Then as they gain experience and confidence in their trading strategies, they can always increase their lot sizes.
⦁ Lower trading costs
Another incredible benefit of CFD trading that makes it a worthy investment is lower trading costs. Contract for difference brokerage fees are often much more affordable than those of most traditional trading methods. Brokers often get their earnings from daily percentages that are earned through financing the transaction.
Additionally, traders often pay the “spread” on a position when they decide to sell. That’s why you need to understand the broker’s fee program before you go ahead and open an account with your broker and start trading. You need to know exactly how you will be charged for making trades before you give out your hard-earned cash to a broker.
⦁ A wide variety of trading opportunities
This is also another incredible benefit of CFD trading that has made it gain massive popularity. CFD trading usually offers access to a wide range of asset classes. This means that you are not limited to what you can trade. Traders can trade stocks, indexes, treasury, shares, and currencies such as cryptocurrencies.
⦁ No expiration date
CFD markets, unlike other traditional methods of trading, do not expire and neither do they depreciate over time either. They also have fewer restrictions on closing a position.
This means that traders can hang on to the position for a much longer time compared to other types of investments. So they don’t necessarily have to worry about “rolling over” a contract. Of course, this makes it easier to express a long-term outlook since it is possible to “buy-and-hold.” So traders can wait until when it is a perfect time to sell.
Final thoughts
It is no secret that contract for difference trading offers lucrative benefits. However, due to their substantial rewards, this investment can pose significant risks as well, which a trader must consider before opening a position. To maximize your opportunity as a CFD trader, you must follow the best practices of this investment before you open a position and also be very cautious when you want to commit capital to a CFD trade. After all, it is your duty to protect your money!
