The Advantages Of Using CFD As An Instrument

The Advantages Of Using CFD As An Instrument

CFD are instruments that can be used to take positions in stocks. Now, the question arises if they are the same things as stocks why use them at all, why not use the real thing itself?

The answer to this is pretty simple. Taking positions in the market usually can be done through two ways. Either you should have all the money upfront with you, or you will have to borrow the money from someone and will have to use the shares as collateral.

CFD trading is an efficient way of accomplishing the second task that is also the darling of many traders. This type of trading helps you take positions in multiples of what you have with you. This basically means that for every $10 you have, you could take a position up to $100. So if the stock went up by 10%, you would gain 100%!

But that is your gross margin. CFD helps by cutting your trading expenses. This means that whenever you have to hold these positions overnight, you have to borrow money. Also commission (brokerage) is payable on each buy/sell transaction and is a percentage of the total amount.

CFD trading allows you to borrow cheaper as compared to what your competitors might be able to get in the market. Also the commissions charged are considerably lower. Also, there is no minimum amount that needs to be kept in the account if you are not in an active trade.

Bringing costs down brings you more maneuverability. An average trader will get 2-3 trades right on every 10 that he does. With CFD your transaction costs reduce and you can perform 12 or 13 trades at the cost of 10 direct trades.

Now the more you trade, the more likely you are to make more profits. So costs cut add to profit disproportionately. It gives you more freedom to cut your losses more often and undo the excess baggage that brings down your overall profitability.

CFDs help especially when you trading with the momentum. This entire means is that you notice that the stock is on an uptick and you expect it to remain so for some time at least. You can quickly enter and exit the trade with only 10% upfront payment. In a matter of minutes, you might have made percentage returns that are enviable if you look at deposit interest rates.

Also the accounts allow you to place specific orders. So you could limit your loss by setting an order that sells it the moment it reaches a particular price. You do not have to be manually present to execute the order.

CFD trading is a mix of financial leverage and technical superiority brought to the doorstep of the retail lender. Prior to CFDs, such trading was the prerogative of wealthy individuals and big investment banks. There was very little option available to a retail investor and the transaction costs deterred them from entering into such trades.

Like any other instruments, CFD has its own pros and cons. It is suitable for investors who can predict the movement of the market carefully and want to gain from it. A more risk-adversive investor might not want the leverage but then the return is also just about average.

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