Over the last 18 odd years, I’ve traded a variety of instruments from shares, warrants, share instalments, futures, you name it, but then, I discovered CFDs (Contracts for Difference) and I haven’t looked back.

Today, I’m going to introduce you to this instrument because it could make your trading, more profitable and effortless. With CFDs you can trade almost any market- from shares, commodities, indices to currencies. And, you can trade on whether the price is likely to go up – or down!

Here are my top Five reasons why I trade CFDs over shares…

Reason #1: CFDs are leveraged instruments so you can make magnified returns!

By trading CFDs you’ll have the full benefit of trading any instruments you desire, and only pay a fraction of the price.  So let’s say on average the gearing for a CFD is 10 times, and you’re dealing with the underlying share price movement.  This means that for every one share you buy, you’re exposed to the value of the ten shares.

Let’s use an example, so I can explain it better…

If you buy 10 Sasol shares worth R130 per share at a gearing of 10 times, you’d only have to pay R1,300 (R130 X 10). So essentially, you’re buying 100 CFDs on Sasol. You’ll have an exposure of R13,000 (R130 per share X 100 CFDs). The margin requirement is 10%, you need to put down.

So, you’ll only have to put in an initial deposit of R1,300 (R13,000/10).

So you’ll pay a fraction of the price and be exposed to 100 Sasol shares even though you paid for 10 Sasol shares value (R1,300 ÷ R130) per share.

What a bargain!

Reason #2 The costs are much cheaper when dealing with CFDs compared to shares

You don’t actually own anything physical when you deal with CFDs. So the cost of trading is lower. With shares, you are subject to paying costs like, stamp duty, STRATE, STT and of course the full value of the share. And usually, the brokerage is a lot cheaper trading CFDs compared to buying shares.

Reason #3 Market goes up and market goes down and you can still profit!

Traditional investors generally buy into the market and hold for long periods of time, regardless of which direction it’s moving in.
A CFD (contract for difference) is a contract to trade the difference between the opening and closing price of a share or index. So, for this reason, you can take advantage of the market going up and buying (going long) at a low price and selling at a higher price. Or you can anticipate that the market is going to go down and so you can sell (go short) at a high price and re-buy at a lower price.

Reason #4 You don’t have to worry about your contracts closing you out

Unlike Single Stock Futures and other derivatives, CFDs don’t have an expiry date. So you don’t have to worry about your contracts automatically closing you out. But bear in mind, you’re still trading based on the underlying share, so you still have to watch out for a cautionary on suspension or worse, a delisting.

Reason #5 You might not own the share but you will get paid the dividend!

If you want to receive the benefits of getting paid dividends then you need to know two tips to receive them.

First thing you must do, is make sure the underlying shares that you hold, pay dividends.  And second, which is crucial. Know that you can only receive dividends if you buy (go long) the CFD on the underlying shares which issues them. If you sell (go short) a CFD that is linked to a share that pays dividends, you have to pay in.

The beauty of CFDs are it allows you to hedge your portfolio

if you are expecting a market dip in the short term, CFDs offer a great way to hedge your portfolio,

They also give you flexibility – you can trade the CFD on big brand stocks, that you maybe cannot afford to add to your portfolio or would have to wait a long time to see any real growth in that stock, but a small % rise in the stock price of say Adobe can give you big gains in a matter of days if you have bought the CFD, thanks to the gearing.

If you’d like tan easy way to get started trading CFDs, then check out Pickpocket Trader or Red Hot Trader.