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Why Should Investors Try CFD Trading?
3 minute read
On account of Australia’s reliance on the world’s second-biggest economy, a hard landing in China could cause a domestic recession according to Oxford Economics. But while rate cuts by the Reserve Bank of Australia and a drop in currency could also encourage a quick recovery, several investors are naturally already choosing to explore alternative financial opportunities.
One of which is Contracts for Difference or CFD trading. In essence, CFDs allow you to open a contract for the difference in price of an asset, from the point of opening to when you close. But why should investors try CFD trading against a backdrop of global financial uncertainty?
CFDs are a leveraged product
Arguably the most advantageous reason to choose CFDs is that they provide a much higher leverage than traditional trading. Although a lot depends on the underlying asset (for example stocks and shares), standard leverage in the CFD market begins as low as a 2 per cent. This means less capital outlay for the investor and greater potential returns.
Many traders are only interested in CFDs as they allow you to take advantage of small price movements with small amounts of money. However, a larger leverage can increase losses, so CFDs require a high level of risk management too.
Global market access and a variety of trading options
With most CFD brokers offering products in all the world’s major financial markets, investors can trade almost any market as long as it’s open.
In addition to global market access from a single platform, a variety of trading options are available too. These include stock, index, treasury, currency, and commodity CFDs. As a result, both stock traders and investors of other financial vehicles can benefit from CFD trading.
No shorting rules or borrowing costs
Investors will know that certain markets have rules that do not allow shorting at certain times. Then again, some markets will require the trader to borrow the instrument before shorting, while others have different margin requirements.
But generally speaking, CFD trading involves no rules like this, allowing investors to short an instrument at any time. On top of that, there is no borrowing or shorting costs either, as you don’t actually own the underlying asset.
No trading fees
Rather than charging commissions or fees to enter or exit a trade, several CFD brokers make money by getting investors to pay the spread instead.
Traders must pay the ask price, but to sell/short, must take the bid price. This spread may also be small or large depending on the volatility of the underlying asset, but it is almost always a fixed spread.
No day trading requirements
With some markets, you will need a minimum amount of capital to day trade or only be allowed to make a certain amount of day trades within certain accounts.
However, the same can’t be said with the CFD market, which is not bound by these restrictions or requirements. While minimum deposit amounts do exist, they can often be as little as $1000.
For more information about trading CFDs, read the Australian Securities & Investments Commission’s guide.