subject: Reasons For Trading CFDs [print this page] Reasons For Trading CFDs
CFDs: The Benefits
There are a number of reasons why CFDs appeal to investors. First of all, CFDs allow you to take a long (buying) or short (selling) position in the market. This flexibility allows you to potentially profit from a falling market. If you think that financial market that you are interested in will fall then with CFDs you can speculate on that happening. Conversely, buying CFDs when you think that prices will increase will result in a profit once you close the CFD at the realised higher level in the underlying market. Of course trading CFDs can also result in losses.
Secondly, CFDs are leveraged financial products. You can maintain a position in a market with only a small deposit. This means that you can employ your funds elsewhere. It also means that market movements are magnified, a useful feature for day traders.
However the leverage can work against you and your losses can exceed your initial deposit. A way to help to restrict this is by using a guaranteed stop order. This is a trading order that automatically closes your position at a predefined level in the underlying market.
Thirdly, you can trade CFDs on a range of financial markets. You are able to open a CFD account with one of the many CFD trading companies in the UK. A standard feature of many of these CFD accounts is the ability to switch from trading CFDs on, for example, an index such as the FTSE 100, to shares, commodity prices or the foreign exchange market.
Finally, there is currently no stamp duty to pay on CFDs*. This is because you do not actually own the underlying financial instruments, you are simply speculating on price differences.
CFDs: Understanding the Risks
CFDs can be an attractive financial product to trade. Understanding the risks involved with CFD trading can help you to control your losses.
As mentioned above, CFD trading is a leveraged type of investment and this product involves a high degree of risk. You can incur losses that are greater than your initial stake or investment.
Furthermore, financial markets can prove to be more volatile than you might anticipate. It is advised that you monitor your open CFD positions, so that you do not sustain unanticipated losses.
If you are trading through CFDs and Financial Spread Betting, you should only invest using money that you can afford to lose; always make sure that you understand the risk when trading with these investment products. It is important to note that Contracts for Difference and Spread Betting may not be suited to all classes of investor so where necessary seek independent trading guidance.
* Based on present United Kingdom and Irish tax law, this could change/differ depending on your own situation.
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