Contract-for-difference trading is a popular alternative to typical investing because it allows you to maximize capital investments and, as a result, improve your potential earnings or losses. Negative balance protection has grown in popularity in recent years, especially among brokerages that provide it to protect you from significant losses that would put your trading account into debt.
Find a more in-depth explanation here! Here are some of the other key advantages of CFD trading.
Low-cost commission rates
However, the high level of risk associated with CFDs is matched by the low commissions charged on trading them. Most stockbrokers that offer CFDs will charge anywhere between just $5-$25 per trade rather than hundreds of dollars, as with traditional stockbrokers. And this means if you are planning on making more frequent trades, it can be an affordable option.
Trading commodities, forex and indices all have one thing in common:
- Their volatility.
- Meaning they tend to see increased swings both up and down.
- Making them great candidates for contracts for different trading.
Let’s say you want to engage in frequent transactions with these sorts of investments. It may be advantageous to your bottom line because the contract for difference brokers frequently provides very low spreads, so you won’t have to pay a lot in commission when placing an order to purchase or sell.
Only pay for what you use.
With CFDs, it is possible to take out a position with 1-10% of the value of any stock at any given time, meaning that while there is still exposure to the underlying company’s performance, only part of your account’s capital will be tied up until the order is closed. This allows traders using contracts for difference trading to make short- and long-term investments without tying up all their funds in one shot, even though it is still possible to do so if desired.
Ease of use
One of the significant advantages of CFD trading is that it is simple to comprehend. Traders can work anywhere, even when they’re not sitting in front of their computer. When a trade order is placed, an email will be sent with any changes in the current CFDs worth, allowing traders to close positions from anywhere they have internet access, even if they are on vacation.
The world for trading 24 hours a day
Stock markets worldwide open at different times during the day, meaning there are periods when certain stocks may become difficult to trade due to low liquidity levels.
However, because contracts for difference trading is conducted online, this allows investors to use CFDs anytime access where liquidity levels never seem to fall below the minimum requirements.
This is because, unlike traditional trading methods, CFDs have no opening or closing times which can provide investors with an opportunity to take advantage of these changes in liquidity levels by making trades at specific intervals where prices are more likely to fluctuate.
Short selling allows traders to make money on falling markets (not available for all brokers)
When you want to purchase the stock but believe that its price will increase over time, it would be ideal if you could make money not only when the market goes up but also when it falls.
Fortunately, this is possible using contracts for difference trading because short selling is one of the features offered by most online brokers today. Since there are no limits regarding how many shorts can be placed, this means investors can make as many profits as they want regardless of which direction the market is moving.
CFD traders may profit from several distinct, sometimes lucrative benefits thanks to these instruments. Because of their substantial financial gain potential, these investments still represent significant risk and must be thoroughly analyzed before placing a bet.
Traders who want to make the most of this investment approach should follow CFD trading best practices, conduct extensive research before creating a position, and exercise caution when putting money into any CFD trade. Meanwhile, make sure you understand your selected broker’s fee schedule and look for a broker who includes risk-limiting features like negative balance protection.