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

• Leverage

• Low commissions

• Profit from falling markets

• Perfect portfolio hedge

• Access to dividends

• No time expiry

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.

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.