CFD trading: Why you should consider a change-up in your investing strategy
The temptation for traders, and especially newcomers to the world of investing, is to dive straight into trading raw assets – forex, stocks, precious metals, and so on.
But actually, there is another instrument you can trade that minimizes some of your risks without taking away the potential for significant gains.
Contracts for difference, or CFDs as they are more commonly known, enable you to trade on the difference between the opening and closing position of a contract – rather than owning the asset or a share of it.
Many brokers offer CFD trading, and so there is no shortage of supply on the market, and you can open CFDs in a wide range of assets, from forex and stocks to commodities and indices.
So what is the point of trading CFDs? Well, you can still trade and speculate on the price movements of a specific instrument, but you won’t take ownership of it – helping to minimize risk and ensuring you can exit the trade with ease.
Consequently, there’s money to be made, and CFD trading tips will help you build a strategy to get you started.
The long and the short of It
Newcomers to CFD trading tend to have a similar thought in mind …. what’s the catch?
Well, there isn’t one. You can perform all of your normal functions as a trader in CFDs, profiting from an increase in value of an asset when you buy or benefitting from a short position when markets take a downturn.
What is interesting about CFDs is that you can hedge a position that you might already have open. For example, you could own shares in Apple and be holding them in the hope that their value will increase in time.
But if you are concerned about a particular market happening – maybe they have an earnings report upcoming at the end of a quiet quarter – then you could short-sell Apple in the hope of offsetting some of your loss (or banking a profit).
With such a range of options available, enhanced by speed to market and the ability to implement a selection of strategies, CFD trading should be incredibly popular.
And it is, but why are some investors so hesitant to get involved?
In many cases, a broker will charge overnight fees when you hold a CFD position past the end of a trading session.
That can be off-putting for some and explains why CFD trading tends to be preferred by day traders who exit their position before the closing bell.
Another factor to consider is that CFDs are not permitted in all parts of the world, and so in some cases, a broker will set up their own market for opening and closing contracts for difference.
By being the market maker, brokers can offer liquidity instantly – there are no concerns about waiting for an opening. Leverage may be lower, but there are no issues or wait in actioning your order, which is essential when locking in a profit in the dying embers of the trading session.
CFD trading for pro investors
There will be experienced traders out there that have never even considered investing in quick-turnover CFDs.
And yet, in essence, CFD trading uses the same mechanics as traditional investing but with much quicker access to the market.
Transaction fees tend to be a lot lower, too, with fewer concerns about spreads and liquidity, and so you can actively trade an asset in – as is often the case – more favorable conditions.
The ability to determine the size of your investment is also a great bonus, as there’s no requirement to pay the full retail price of an asset.
While not all trading strategies are advised when utilizing CFDs – scalping can be tricky with the often-wider spreads between buy and sell price. Trading CFDs is an excellent option considering all of its benefits compared to traditional investing.
It’s not without implied risk because – as we know – markets can move against us even when we have performed the necessary analytical due diligence. We also need to make sure we are only trading with the finest brokers because some less-than-reputable firms have been accused in the past of manipulating their CFD spreads and increasing your risk of slippage.
But these risks can be mitigated, and the advantages of trading CFDs speak for themselves – give it a go today, and you might be surprised at what you can achieve.