A lot of people get drawn to trading CFDs because of their remarkable benefits. It attracts bedroom traders to full-spectrum traders from huge companies and financial corporations. So, what really are the advantages of trading Contract for Difference?
Leverage and Margin
One of the major advantages that every trader in CFDs gets to enjoy is the leverage that can be used in every transaction. Margin is used in CFD which means that the trader can open a trade by borrowing trading funds from the broker to amplify their trading positions. Practically speaking, a margin requirement of about 5% means that you are loaning 95% of the asset’s price from your broker. This process isn’t actually a typical loan where you have to pass several requirements. It is more like an automatic transaction that happens between the broker and the trader. With the use of leverage, rampant gains become possible just within a short period of time. This benefit is one of the drawing points of CFDs, attracting more people to take advantage of this benefit every day.
Tax Efficiency
What makes CFDs tax efficient? CFD traders do not own the underlying asset. That being said, they are also exempted from additional taxes that can accumulate over time. Just like in the UK, traders and investors are originally obliged to pay for Stamp Duty together with the Capital Gains Tax. But with CFDs, you are not obliged to pay the Stamp Duty because there is no actual share transaction taking place.
Flexibility
CFDs are naturally flexible because they allow making money from the rise or fall of the market. If you think that the share market is starting to fall, you can swiftly jump into the sell-side to make gains just as heavy as when you are on the buy-side. More importantly, you can speculate CFDs in a wider range of markets like commodities and indices. You can trade on these markets from a single platform, which is an added benefit.
Low Cost
It is cost-effective to trade CFDs. Why? Aside from the savings that you get for not paying the Stamp Duty, you are also able to enjoy low-cost trading compared to other markets or traditional trading.
Liquidity
Liquidity is something that needs to be considered when trading a particular market. The presence of liquidity ensures that there is a market to sell your products. If you have a wider market, your notional gains are easily realized. It also becomes more effective to achieve the return that you are expecting.
Hedging
Flexibility and liquidity combined make CFDs perfect for hedging. Traders who manage wider portfolios are the ones who are mostly enjoying the benefits of hedging.
No Expiration
There are no expiration dates set on CFDs just like when you trade other instruments like futures. With Contract for Difference, you are able to hold your trading positions for a long period of time. This provides flexibility to get through every trading cycle without thinking of a specific timeframe.
