Trading CFDs online has become very popular, as traders discovered this financial product allows them to speculate regardless of the direction of the market, and without investing a large amount of money to start. The term “CFD” stands for Contract for Difference. Let’s take a look at the main benefits of trading this derivative product.
- Margin Trading & Leverage
CFDs are a leveraged product and they are able to trade on margin. This means that to open a position, a trader must only put aside a small amount of money, a percentage of the total value of the position, called collateral. This allows you to invest more money than you have in your account, allowing for greater market exposure.
- Buy or Sell the Market
With CFDs, you can take advantage of falling markets, as well as bullish ones. As you do not own the underlying asset of the CFD, short selling an asset becomes as easy as buying it and allows you to make money regardless of the direction the market takes.
- Low Transaction Costs
CFD brokers such as UFX, will offer their clients cheaper transaction costs compared to buying assets like stocks with a “full service” broker. The main cost for a trader will be the spread – the difference between the sell and buy price of an asset.
- Trade internationally & out-of-hours
When you deal in one account, you can have access to the most important international markets and category of products: stocks, bonds, ETFs, indexes, commodities, etc. You can better diversify your portfolio to reduce your risks. Most CFD brokers also offer clients extended trading hours, so they can trade, even if the underlying market is already closed.
Hedging is an important part of trading to protect your portfolio, as risk management is an essential element for any trader. With CFDs, you can hedge an existing long position by short selling it to protect from short-term drops. In effect, this means you can have a long and a short position open on the same asset, at the same time.