Why Trade CFDs?

In recent years, Contracts for Difference (CFDs) trading has exploded in popularity, particularly in Europe and Australia. And for good reason, since CFDs offer a number of unique benefits in comparison to other trading products, specifically physical share trading to mention one.

CFDs allow investors and traders to gain economic exposure to a wide range of financial assets without having to take physical ownership of the underlying asset. To bring the range of markets into perspective, IG Markets, for instance allows you to trade over 8,000 worldwide equities, indices, commodities and currency pairs. Clients also have the ability to trade long or short depending on whether they believe an asset’s price will rise or fall.

You see, contracts for differences allow private investors to speculate on the difference (‘mind the gap’) between the price of something today and the price of it tomorrow, or next week, or the next month.

As one of the world’s fastest-growing trading products, CFDs are very simple and relatively inexpensive to trade, and are more flexible than other trading alternatives. CFDs also suit diverse trading strategies, and can complement your existing investing methods. You can also speculate on a market rising or falling in price and CFDs allow you to trade in a very wide range of instruments such as shares, indices, commodities and currencies.

CFDs were originally created to imitate traditional share trading, but they differ because the investor doesn’t actually own the share; it is a derivative product. So an investor or trader can seek to gain from price fluctuations without putting down large amounts of capital. They provide the opportunity to make profits (or losses) from a wide range of markets including shares, indices, foreign exchange, interest rates and commodities.

For starters, CFDs are leveraged trading instruments. Leverage allows traders and investors to potentially multiply their investment; trading larger sizes for a smaller outlay than conventional share dealing where normally you have to pay for the entire trade. This means that experienced investors are able to deal in bigger sizes than conventional trading when utilising leverage. The advantage of a smaller outlay, as well as the opportunity to gain from rising and falling markets (assuming you have traded in the right direction) translate into an exciting new trading product, which is widely considered a smarter alternative to physical share trading. Another key attraction of trading with CFDs is that they can be utlised with great effect to take advantage of a developing trading pattern in the market.

  • Easy to trade and understand – this is especially true if you have experience in trading shares as the same processes apply. For example, if your share price is $5.00, the CFD price will be $5.00. The only difference is that you will be trading on the price of a share that you don’t actually own.
  • Cost effective – although there are risks involved, like any other investment, opening up an account in which to trade CFDs is minimal with some providers charging as little as 1% margin. It is therefore possible to make profit on a small investment.
  • Trades can be long or short – an attractive option with a CFD is that you can trade long by gaining profit from prices going up, or trade short and profit on prices going down.
  • No expiry – unlike other derivatives, there is no set length of time that you can hold a CFD for. You can hold it for as long or short a time as you wish to. However, it is always important that you set yourself goals before you trade as to not overstretch your investments.

A short sale is a trading technique where a trader borrows a stock (or commodity futures contract) from a broker and sells it, with the condition that it must be later bought back (the trader hopes to buy it back at a lower price) and returned to the broker. Short selling (or ‘selling short’) is a technique utilised by CFD traders who try to profit from the falling price of a stock.

Further CFD Expansion

Despite a slowdown of growth in the retail sector from its breakneck rate of two years ago, IG Markets is still opening thousands of new CFD accounts a month. The introduction of Direct Market Access coupled with the new abilities CFDs gave retail investors triggered extremely strong growth. However, CFDs are not only for the benefit of retail investors, as there is also sustained growth in institutional customers taking advantages of the benefits CFDs offer, partly because of the recent growth of hedge funds.

The range of CFD products has also expanded dramatically since their inception. For instance, IG Markets currently trades CFDs on the FTSE 100, 250 & 350 stocks and also do most liquid shares with a market cap of above £25m. In the US they do everything in the S&P 500, all the Nasdaq 100 and most other composite stocks that are at least as large as the smallest Nasdaq 100, stock roughly $1bn market cap. The company also offers many continental European products and selected Japanese and Australian CFDs.

For knowledgeable investors, CFDs offer a quick, flexible and cost effective way to speculate on whether an investment will go up or down.

Please note that may not be suitable for all investors, so please be aware of the risks.