If you are interested in trading, you should know about CFDs. They offer many benefits to traders, especially those interested in long-term investments.
First off, what exactly are CFDs? They stand for contracts for differences. It lets investors get exposure to the change in the price of an underlying asset without having to purchase that asset. For example, let’s say that two equal partners agree to exchange £100 for another currency equivalent when the value of that currency rises or falls by 10%. If it then goes up by 10%, the investor has made a £10 profit and ends with £110 in total. However, if it goes down by 10%, they lose their initial investment of £100.
It is how they work in general, but what are the benefits for traders? Well, firstly, it allows traders to invest in assets that they otherwise might not be able to – only requiring a small initial investment of just £10 per trade. It also allows investors to build up their portfolios with smaller investments that can be increased when conditions allow.
Leverage
The other significant benefit of CFDs is that they offer leverage and shorting strategies which can help you profit from both bull and bear markets. For example, let’s say that we have an asset that has previously shown strong bullish momentum, expecting the trend to continue. It would not be possible to benefit from that asset’s potential without actually purchasing the asset itself. By trading CFDs, however, this is suddenly possible.
The only issue with trading long-term in a bullish market is the risk of losing your capital before you can reap your trade benefits. By using CFDs in this way, you can close trades when conditions change and avoid losing assets due to changing market sentiment.
There are loads of benefits to trading CFDs during bear markets. Bearish markets tend to create panic throughout financial institutions, and it isn’t unusual for investors to start selling assets at very low prices because they need access to cash ASAP. This selloff will often create an opportunity where traders can buy assets at a very low price and sell them back when the market recovers – something that isn’t ordinarily possible for traders who rely on trading capital.
There are many more benefits of trading CFDs—we only briefly touched on a few. You can use them for trading both bull and bear markets and limiting your risk should condition change before you have time to profit from your trade. This is why more and more traders are starting to look into using CFDs as part of their investment strategies.
Which Instruments Can I Trade As CFDs?
The types of financial instruments you can trade as CFDs with brokers depend on the market in which you are trading. Always check on your broker’s website, like on the Saxo site, to see what CFDs they offer. Generally, products available include stocks, indices, currencies and commodities. Please note that this list may vary from time to time, and it is advisable to check before entering into any transactions. The following is a list of some of the products typically available.
- Stocks
- Currencies
- Currency crosses (e.g., EUR/USD)
- Equity indices (e.g., FTSE 100)
- Commodities (e.g., Gold, Light Crude Oil)
- Indices
- Exchange-Traded Funds / ETCs (which track indices)
You may also trade with CFDs on other financial instruments which are not included in this list but are available with brokers globally, such as Saxo. This list will be updated from time to time, and it is therefore advisable to check before entering into any transactions.
In Conclusion
Please note that the availability of certain products may vary between different markets (for instance, derivatives trading hours for Stocks, Indices and FOREX typically fall within the following periods: Stocks – 06:00-22:00 GMT; Indices – 08:00-20:30 GMT; FOREX – 08:00-22:00 GMT). So you must check your broker’s site to ensure you trade the correct timeframes.
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