Trading Contracts For Differences means that you bargain prices that derive from the fundamental market, but not on the fundamental market itself. Over the years, this has become a popular type of trading because it lets traders: make funds grow with leverage, go up or down, get profit while not having to pay stamp duty, trade a big selection of markets, matching the underlying market and safeguard (hedge) a share collection.
Making funds grow with leverage
CFDs authorize your investment resources to increase since you have to just deposit a portion of your trade’s entire value to unlock a position. The deposit that will have to place is called margin.
The margin determinant and the size of the position will clarify how much you will need to deposit for the market you have picked. In that way, if a margin determinant of 20 per cent, a position of £1 000 will call for a deposit of £200.
Nevertheless, it is crucial to keep in mind that your profit or loss in total will be based on the entire size of your position and not how much you deposit.
Going up or down
Since a CFD trade includes a consensus to exchange the difference between the opening and closing costs of your position, it is more adjustable than other types of trading. This provides you with the opportunity to trade on markets that are going both down and up.
While you are trading CFDs on a dealing outlet, you will notice two different prices: the buy and sell prices. If you consider that the market is rising in its price, you trade at the buy price, and if you believe that the price is going to decrease, you trade the sell one.
Get profit while not having to pay stamp duty
Since you can’t own the fundamental asset while trading CFDs, you will not be required to pay stamp duty. And given that you can counterbalance any kind of losses you had with profits for CGT liabilities, Contracts For Difference can be a good option for hedging.
Trade a big selection of markets
You can utilize CFD to trade more than seventeen thousand markets, along with shares, forex, cryptocurrencies, and others. You can also go without accessing a multitude of platforms to trade various markets. All of that is on hand under one profile login, everything you need, you can simply trade through the web, your smartphone or tablet.
Moreover, you can trade certain markets outside of trading periods if you want to take advantage of company proclamations. Just remember that the market’s opening price could be different from its “after hours” price.
Matching the underlying market
CFDs are modelled to imitate trading their fundamental market quite precisely, which is different to spread bets. For example, if you purchase an Apple share contract for difference, it is the same as purchasing one share in Apple. So, if you purchase the equal amount of 2,000 Apple shares, you will buy 2,000 Apple share contracts for difference.
In the meantime, purchasing or selling a forex contract for difference, is equal to purchasing a specific amount of base currency by selling the same amount of quote currency. So, purchasing one CFD on GBP/USD would provide you with the identical exposure as purchasing £100,000 in USD.
If you are already skilled in non-leverage markets, contracts for difference can be more common than other types of leverage trades.
Safeguard a share collection
Take for example that you possess a multitude of shares in HSBC and you are planning to hold onto those shares for a long period of time. You consider that the banking zone may start declining, so you wish to counteract any prospective losses using CFDs. That’s why you end up by opening a short position.
If you are right and your shares in HSBC lose value, then your contracts for difference will gain you profit, countering your losses. However, if your shares in HSBC grow in value, then you should close the CFD position and counteract the losses you encountered against potential profits for CGT reasons.
Nicole Bishop is a Financial Analyst at NSBroker. Nicole trades CFDs on cryptocurrency markets and provides technical analysis of popular trading instruments. She has been involved in the industry for many years, and because of this, has gathered a lot of knowledge surrounding this area.