As CFD trading lets you speculate on such a wide range of assets and commodities it’s no wonder that the concept could be said to have revolutionized trading in quite a short space of time. By taking a position on the possible price movements of a wide-ranging spectrum of financial markets the resulting rises or falls can bring big rewards for a canny CFD investor. Also, as the underlying instrument is never actually owned there are no tax implications such as UK Stamp Duty to pay on any profits.
However, CFDs have really made their mark by offering traders a way of optimising a number of methodologies and approaches that can now be taken when dealing with the markets and the scope of the opportunities available is what really sets this particular financial instrument apart from other more established and traditional models.
There are literally thousands of different markets open to those wishing to trade in CFDs. This means that existing specialized knowledge in areas such as stocks and shares, various commodities, bonds, forex and even whole indices can be put to use.
Forex pairs such as GBP/USD, GBP/EUR, AUD/USD and JPY/USD are popular choices as are commodities including crude oil and precious metals. As well as financial assets such as bonds, other markets can include interest rates set by central banks. the sheer number of markets that can be utilized for CFD trades is one of the main reasons why they have truly changed the trading environment and continue to do so.
Popular investing advantages
CFDs are tax efficient in several ways, in particular for traders in the UK as there is no requirement to pay Stamp Duty. Another big financial plus point is the fact that they are a leveraged product, meaning a small amount of capital can be Used to control a large position to be taken.
In fact, CFDs provide much higher leverage than other forms of more traditional trading, with standard leverage in the CFD sector currently starting as low as a margin of 2%. Although other so-called ‘derivative’ tools can offer a leverage advantage, even though it might not be as efficient, CFDs also come with the bonus that the underlying asset is never actually bought or owned.
n a tightly control global financial arena areas where less regulation means more flexibility for investors is always another big selling point. Once again, this is where CFD trading has caused many new opportunities to open up and give many more people the chance to get involved.
Various markets have rules prohibiting shorting, which can be a very rewarding tactic for a trader. Others have regulations surrounding margin requirements for short and long positions and some require a trader to borrow the instrument before selling short. When it comes to CFDs there are no shorting rules and there is no need to borrow stock to take the position. This is because CFDs can be shorted at any time without any complications because at no point in the process does the trader actually take ownership of the underlying asset.
CFD is based on price fluctuations and as such provide a fast moving trading environment which is the epitome of so-called ‘day trading’ in many ways. some markets require minimum amounts of capital to take part in day trading and can also put limits on the number of trades that can be made within accounts.
CFDs do not have any requirements that hinder day trading and all account holders can do so if they want to. As CFDs also offer global market access from one platform this means that it effectively offers a 24-hour trading environment where all the major markets in the world are there to be used.
The fact that choosing a market for CFD trades offers so many options is perhaps one of the biggest ways in which they have transformed the way investors can look at making trades. Even though experience in business or other investments can be useful in applying knowledge previously gained, the sheer number of markets and assets available to CFD traders means that there is no real need to have specialized knowledge of a particular niche.
The use of technical analysis is another factor in the popularity of CFDs as it can be a powerful tool for investors no matter whether they are DIY individuals or massive international hedge funds. As it is specifically aimed at short-term analysis of charting and patterns the fast turnaround nature of many CFD trades mean technical analysis can be particularly effective in this area.
Often used in combination with other strategies and methodologies, technical analysis is essentially relatively simple to apply but it can be difficult to gain an initial understanding of how to use it to best practice.
As a relative newcomer to the international market trading scene CFDs are still evolving and acting as an agent of change in the process. The less restrictive environment that they provide means that options and opportunities are offered that cannot be found elsewhere.
This ‘newness’ together with a previously unknown combination of advantages for traders means that CFDs have been disruptive to some degree, and there are ongoing reactions from regulatory bodies that are changing the circumstances as time goes on.
However, as CFD trading tends to attract investors who are more ‘hands-on’ and take a deeper interest and level of involvement that some ‘buy and forget’ stock traders, the ever-changing scenario only adds more excitement and opportunity to the mix.