Advantages of trading CFDs
There are many advantages associated with trading CFDs. Below are some of the key benefits.
Trade rising & falling markets
When you trade CFDs, you can take advantage of prices moving up or down in value by taking either a short (sell) or long (buy) position. This means you have the potential to benefit from both rising and falling markets.
Maximise trading capital with leverage trading
One of the main advantages of trading CFDs is the fact you are trading on margin. Rather than putting up the full value of a large position, you only need to pay a small percentage of the position, which is called ‘initial margin’. Trading on margin can potentially maximise profits, but has the potential to magnify losses. This means that you could lose your entire investment if the trade goes against you, if you are a Retail Client. Professional clients can lose more than their deposits and they may be required to deposit additional funds to cover their losses.
To learn more about the benefits and risks of trading on margin, with examples of CFD trades, please read our guide on Margin & Leverage explained.
Diversification & hedging
Traders often diversify and hedge their portfolio with CFDs, especially in volatile markets. It’s seen as an effective way to expand trading opportunities and diversify a trading portfolio into different global markets, given the low margin requirements and trading costs associated with trading CFDs.
Access to a wide range of markets
The wide range of markets available to trade with CFDs from just one trading account is another key advantage. It is possible to trade currency, index, and commodity CFDs from across the globe - Europe, US, Asia and more.
No stamp duty
Because you don’t physically own the underlying asset when trading CFDs, there is no need to pay stamp duty. However, tax laws are subject to change and depend on your individual circumstances. Tax laws may differ in a jurisdiction other than the UK. Please seek independent advice if necessary.
Lower trading costs
Besides competitive spreads and low margins, the cost of trading CFDs depends on the instrument you choose to trade and the length of time you hold the position open for.
You can place Stop Loss and Take Profit to exit orders, even when you are not actively looking at your trades. Similarly, you can place Stop Entry and Limit orders to help enter the market at your desired levels. When trading CFDs, you have access to a number of risk management tools you can apply to your positions in order to limit and manage your risk. You can learn more about the effective use of risk management in our guide How to manage your trading risk.
While there are many advantages associated with trading CFDs, there are a number of potential risks associated with trading leveraged financial products. They are discussed in the next trading guide.