CFDs, or Contracts for Difference, are a type of trading instrument that allows you to make money off fluctuations in the price of different financial assets. They offer many benefits to investors, including greater flexibility and higher returns than traditional investment vehicles like stocks and bonds.
Higher liquidity
Many types of investments have minimal liquidity, which means it can be challenging to buy or sell them when you need to. This is not an issue with CFDs – as they are traded over the counter rather than on centralised exchanges like stocks, there is much greater liquidity available. This gives you more freedom to enter and exit positions without worrying about market conditions.
Learn more about CFDs from the industry professionals at Saxo.
Lower commissions
CFDs are relatively inexpensive to trade compared to other types of trading, including stocks and futures contracts. This makes them a much more cost-effective option for investors who frequently want to make smaller trades to keep their accounts active.
More leverage
When you invest in CFDs, you can use leverage – essentially borrowing money from your broker – when making trades. Leverage enables you to control a more prominent position than you would be able to with just your funds, giving you more significant upside potential but also a higher level of risk if the trade goes against you.
Understanding how much leverage is appropriate for your particular strategy and risk tolerance is essential.
Greater flexibility
One of the most noticeable advantages of CFDs is their flexibility – they can be traded on just about any financial asset, including commodities, currencies, and stock indexes. This allows you to build a more diverse investment portfolio with exposure to different markets and asset classes worldwide.
More opportunities for profit
With CFDs, you can take long and short positions in underlying assets, giving you greater control over your trading strategy than if you were limited to only buying stocks or other traditional investments. This means that if an asset’s price goes down rather than up, you can still turn a profit by shorting it instead of having to sell your position at a loss.
Lower capital requirements
Unlike many other types of investing, the amount of money you need to start trading CFDs is relatively low – often as little as $1,000. This can be an excellent option for day traders looking to make smaller, more frequent trades to stay active and keep their accounts growing.
No time limits
Another benefit of CFDs is that they have no fixed expiry date like some other investment vehicles. This allows for much more flexibility when it comes to exiting a position – if the market moves against you and your trade starts losing money, you can decide at any point whether or not to close the position and limit your losses instead of having to hold it until expiration even if you don’t want to be in the trade anymore.
Higher returns
Because CFDs have much higher leverage than other types of trading, they offer a greater potential return on investment, even if you only make small trades with limited capital. This can help you grow your account much more quickly without investing huge sums.
Smaller minimum position size
As we mentioned above, you can start trading CFDs with very little initial capital – often, just $1,000 or less, is enough to get started. In addition, many brokers allow you to enter positions smaller than traditional shares or options contracts. For example, a broker may allow you to trade micro-CFDs that represent 1/10th or even 1/100th of the underlying asset’s value.
Portfolio diversification
Another benefit of CFD trading is that they enable you to invest in assets that may not otherwise be available on traditional trading platforms, such as commodities and Forex pairs. This can help you build a more diverse portfolio that includes more assets from all over the world, giving you the opportunity for greater returns and lower risk.
Lower volatility
Many traders are drawn to CFDs because of their relatively lower level of market volatility compared to other types of investments like stocks or futures contracts. Longer-term trends tend to be much less severe, allowing you to make consistent profits over time with significantly less risk than if you were investing in these assets directly.
More control
The most significant advantage of CFDs is that they give you much more control over your trading strategy than other types of investments do. You can trade on leverage, create custom positions with different expiry times and strike prices, and set stop-loss orders to protect against losing trades in a fast-moving market environment – all without needing to buy and sell actual shares or options contracts.
