Contract For Differences (CFD) – Chapter 2: The benefits of CFD’s

This is chapter number 2 out of 12. Read the rest:

Read Contract For Differences (CFD) – Chapter 1: An Introduction to CFD’s

There are many advantages to trading CFDs, lets take a look at how they compare in the marketplace:

• You are able to leverage your trading in the CFDs market meaning you can trade in much bigger volumes.
• There are no prohibitive stamp duties payables for CFDs trading. You are able to save as much as 0.5% in transaction costs as compared to equity trading.
• You also have the ability to profit from both bear and bull’s market as you don’t own the underlying stock.
• Your one trading account is able to give you access to a wide diversity of financial markets.
• You are able to prevent losses while maximizing your profitability by utilizing risk management tools like “Stop Losses”. And “Limit orders.”  You are also able to leverage your trading with the use of margins and as such earn higher level of profits.
• There is no requirement to purchase the actual asset. Because CFDs are just contracts between two parties regarding the value of a share, there is no requirement for legal title to the actual asset. There is no direct link between the investors and the actual asset which make up the foundation of the CFD. The reason why this is regarded as a benefit is because there are no transactional costs involved in holding the legal title to the underlying asset of the CFDs.
• CFDS are also entitled to dividend yields as well just like shares. If you hold a CFD at the time of the company’s Annual General Meeting (AGM) where normally shares dividends are announced and paid out, you will also be entitled to the dividend that is accredited to your portion of shares assigned to your CFD.
• If your cash is tied up in a short term CFD, you will be paid interest on that money as well by your brokerage firm. If that money was tied up in the equity market, and you sold those equities, you will be paid interest on the proceeds of that sale. As you are not benefiting from such interest, your CFD brokerage firm is compensating for that amount that you would had earned if you had invested your money in the equity market.
• You have the ability to short the market. Investors are able to use Options to short a downtrend market to profit from the decline of prices. Likewise with CFDs, you are also able to short your position without the actual purchase of the shares.
• CFDs are considered high risk and if an investor does not seek to protect themselves properly, they could incur huge losses if the market moves against them. One such way in which an investor can protect himself is to utilize mechanisms like “Guaranteed Stop Loss” provided by the CFDs brokerage firms. You should look at high profile brokerage firms that deal with CFDs .With this “Guaranteed Stop Loss”, the brokerage firm will close your market position once your CFDs reach the threshold of losses specified by you. Thus, you will not suffer further losses.
• Flexibility in trading hours is accorded to those who trade in CFDs. In the equity markets, once the market is closed, you no longer have the option to trade in that stock. However, with CFDs, you are still able to trade with them as most CFDs brokerage firms still allow you to deal in them even if the market for the underlying assets have ceased trading for the day. Those private investors who have day jobs will be the ones who will benefit the most from the after hours trading ability.
• There is also a diverse variety of assets which CFDs cater too. The options range from all major listed stocks, indices, currencies, commodities and market sectors. With this wide diversity, investors are able to spread the risk of their financial investment to a wide range of investment assets and markets.
• Another benefit about investing in CFDs is that they do not have an expiration date. Options on the other hand, need to be exercised upon before their expiration date or else they will become worthless. The only limitation with regards to CFDs is that they will continue to incur interest on the amount of margin utilized for the duration of the contract. The only way which a trade in CFDs can close his market position is to act out the contract and settle the price differences.

 

It is for these few reasons that CFD has become an extremely attractive investment vehicle as compared to the equity market.

Read Contract For Differences (CFD) – Chapter 3: The risks of investing in CFD’s
Read Contract For Differences (CFD) – Chapter 4: The Main Features of the CFD’s
Read Contract For Differences (CFD) – Chapter 5: Trading In Bullish & Bearish Markets
Read Contract For Differences (CFD) – Chapter 6: How CFD’s work
Read Contract For Differences (CFD) – Chapter 7: Shares Trading Versus CFD’s Trading
Read Contract For Differences (CFD) – Chapter 8: Available Markets for Trading CFD’s
Read Contract For Differences (CFD) – Chapter 9: The differences between Spread betting and CFD Trading
Read Contract For Differences (CFD) – Chapter 10: CFD Trading With Stop Losses
Read Contract For Differences (CFD) – Chapter 11: Other Types of Orders
Read Contract For Differences (CFD) – Chapter 12: Conclusion