Advantages of CFDs
Traders and investors over the last 10 years have become increasingly sophisticated and knowledgeable about managing their own finances. CFD trading has increased in popularity as investors have realised the benefits over traditional forms of investing. These are:
No stamp duty
Unlike traditional share dealing there is no stamp duty to pay on a CFD trade.
Efficient use of your capital
One of the key advantages of CFD trading is that it offers 'margin' or 'leverage'. This means you can trade without needing to put down the full value of that position and as your money is not all tied up in one transaction, you can use it for other investments.
For example, to 'buy' the equivalent of 1000 Telecom company shares in CFDs you would only need to deposit 3% of the total transaction amount you might have to pay if you were buying physical shares from a stock broker. If the shares cost 150p then you would only need to place an initial deposit of £45 with CMC Markets (3% of £1500 = £45) compared to the full value of £1500 plus commission and taxes, which is what it would take to complete the equivalent transaction with a stockbroker.
For a more detailed example, visit the CFD trading example.
Trading on margin means you can magnify the returns on your investment but it is important to remember that losses too will be magnified. However, there are many ways of managing your risk with a range of flexible orders including stop losses, limits and OCOs (one cancels other) orders. These orders can be placed online and are free to use.
Profit when markets fall as well as rise
With CFD trading, you can trade on the price of an instrument going down as well as the price going up. It doesn't matter which way the markets are going, you can back your judgement either way, exploiting selling opportunities just as easily as buying opportunities.
Access to global markets
With CFD trading you aren't just limited to trading on share prices. You have access to a whole host of global indices, commodities, currencies and bond prices.