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Trading uncovered: Four benefits of trading contracts for difference

by , 05 May 2014

Contracts for difference, or CFDs, are over the counter derivatives. They trade through a bank or company providing CFD trading rather than an exchange. By trading CFDs you agree to exchange the difference between the open price and the close price of the contract with the bank or company providing CFD trading. So why should you think about trading CFDs? Let's take a closer look…

Benefit #1: CFDs are geared products

CFDs are geared (leveraged) products. This means you can benefit from the price movements of the underlying asset without paying the full price for it. This magnifies your profits.

This is because you trade on margin. As well as this being a benefit, it can work against you. It also magnifies your losses.

Benefit #2: You can go short

When you trade CFDs, as well as making the most of rising markets, you can benefit from falling ones. So you can profit regardless of the market’s direction.

If the market is rising, you can buy into a position (going long). If the market is falling, you can sell the position (going short).

Benefit #3: The trading costs are low

Compared to the fees of buying shares, the costs are low with CFD trading. You don’t have to pay some of the fees applicable to buying shares such as STRATE and secondary transfer tax.

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Benefit #4: CFDs have no expiry date

If you compare CFDs to futures, CFDs have no expiry date. Futures expire every three months. You can exit or roll over a futures trade, but this involves charges.

You don’t have to worry about this when you trade CFDs. But bear in mind, it’s not advisable to hold CFD trades for long periods of time as the financing charges mount up.

So there you have it, four benefits of trading contracts for difference.

Trading uncovered: Four benefits of trading contracts for difference
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