Why Trade
CFDs?
Discover the key benefits
of Trading CFDs
Contracts for
difference (CFDs) have received so much hype in the
last couple of years that it warrants asking the question…
“Why trade CFDs?”
Compared to traditional share trading, CFDs
have some fantastic benefits that every share trader should
look into seriously.
Themajor
reasons for wanting to trade CFDs are
Let’s have a look at each of the reasons
here.
Trading CFDs give
you access to greater Leverage
The
major reason for share traders looking to make the move to CFDs
is to get their money
working much harder for them through leverage.
With
normal share trading, if you have a $10,000 account then you
can only access up to $10,000 worth of shares which can be a
limiting factor when you are trying to diversify your
portfolio. With $10,000 cash in your share trading account you
might choose to trade 2 stocks with $5,000 in each one. Ie
$5,000 worth of BHP and $5,000 worth or Woolworths for a total
of $10,000 in positions.
With
the leverage that CFDs give you access to, that same $10,000
can be used to gain exposure to far more than that amount. For
instance you may wish to trade up
to $30,000
worth of total
positions.
Instead of just buying 2 CFDs at $5,000, you
can now buy perhaps 6 positions at $5,000 each. This enables
you to benefit from a $30,000 portfolio despite only having
$10,000 in your CFD trading account.
$10,000 cash trading up to $30,000 in
positions = 3 * leverage.
You control the
leverage in your account
Most
people are not aware that the use of leverage in your CFD
trading account is one of the most misunderstand yet vital
components of long
term CFD
trading success.
Here
are some guidelines when using your CFD
leverage.
|
Cash
|
Leverage
|
Total Exposure
|
Level of
Experience
|
|
$10,000
|
1
|
$10,000
|
Inexperienced
|
|
$10,000
|
2-3
|
$20,000 - $30,000
|
Traded shares
|
|
$10,000
|
5
|
$50,000
|
Experienced Trader
|
|
$10,000
|
7-10
|
$70,000 - $100,000
|
Professional Trader
|
|
$10,000
|
10 or more
|
$100,000 +
|
Leverage too high. Highly
skilled intraday trader with very tight
stops
|
If
you are starting out then it is important to use as little
leverage as possible. Your number one goal at any stage of
trading is Capital preservation.
What the
professionals don’t know
The
simple fact is professional traders don’t know which way the
market is going at any given time. They have tools that stack
the odds in their favor but even that fails around 40-60% of
the time. Therefore the one saving grace is correct use of
leverage, stop losses and money management
rules.
|