Contracts for Difference (CFDs) have been in Australia for well over 10 years now. Although the number of people trading CFDs is rising, it is still relatively small compared to those conducting traditional share trading.
One of the reasons for the disparity is that people are more familiar with traditional share trading (i.e. the buying and selling of stocks). Australia has one of the highest share ownership per capita among developed countries. Another factor is that CFDs are still considered ‘new’ or ‘risky‘ in Australia, despite their popularity in the UK and Europe.
If you are a share trader or investor who has not considered or even looked into CFDs, you may want to take another look. CFDs offer some benefits that shares/stocks do not.
This article outlines three benefits of trading CFDs (there are more but let’s start with the main ones). First of all though…
What are CFDs?
CFDs, or Contracts for Difference, are contracts you’ve bought or sold that mirror the movements of the asset underlying it. In other words, if you buy 500 CFDs for Bluescope Steel to go long, then you’ve essentially purchased 500 contracts with the expectation that Bluescope shares will increase in price. If the Bluescope share price increases, then so do your contracts and you will be in profit. If the Bluescope share price decreases, then your contracts do too and you’ll make a loss. You never own actual shares of the underlying asset, you own contracts instead. Click here to understand more about CFDs.
Three Advantages of Trading CFDs vs. Share Dealing
Perhaps the biggest benefit of CFDs (and difference from share dealing) is that they are traded on margin, meaning, you only pay a portion of the share price rather than the full share price (usually starting from 5% for share CFDs and 1% for indices). This means a more efficient use of your capital because you only have to allocate a small proportion of the value of your position to open a trade, while still maintaining full exposure to the market.
In effect, you are able to magnify the returns on your investment and have a much smaller trading account than if you were to buy the shares outright. Trading on margin can be a double-edged sword, but in the hands of a disciplined trader it provides cheap access to potentially huge opportunities.
2. Go Long or Short
When you’re trading shares, going short (selling without owning the shares) can be difficult and expensive. Shorting shares is often relegated to the too hard basket.
But when you trade CFDs, going short is as easy as going long. This is because you are trading on the price movement and not physically owning the underlying security. Going short gives you the opportunity to profit from falling prices. Therefore as a CFD trader you have the opportunity to profit from a rise or fall in the market.
3. Access to Global Markets
Did you know that Australia represents a very small portion of the global market? While we have some of the big international companies listed in our stock exchange, the overall Australian market is tiny compared to other developed countries.
With CFDs, you can access and trade Australian as well as other international markets including the US, UK, Europe and Asia. One of the key benefits of trading CFDs vs. share dealing, is that you can take advantage of trading opportunities even when the Australian market is closed. At the same time you can access more liquidity and a wide variety of financial instruments. Australian evening’s are proving to be a very popular time for full-time working clients to trade European index markets and forex when it’s most active.
The trading world has become global, and now provides alternatives to what the typical stock market investor requires. This article points out 3 key Benefits CFDs versus Shares.
CFDs, or Contracts for Difference, are an instrument you can trade without owning shares in the underlying asset that mirror the movement of that asset. They allow you to trade without needing a large account size, enable you to go long or short and provide access to a much wider range of markets.
Which Financial Instruments Can I Trade using CFDs?
There are literally thousands of financial instruments to trade via a CFD trading platform. At TradeDirect365, you can trade the following markets;
- Indices – trade 13 of the world’s largest indices, including the Australia 200, UK 100, Wall St 30 and the Japan 225
- Stocks – we offer over 400 ASX stocks and several hundred stocks from the US, UK and Europe
- Forex – 30+ currency pairs, including majors like AUD/USD, EUR/USD & USD/JPY
- Commodities – trade Gold, Silver, Brent Crude oil and US Light Crude oil
- Cryptocurrencies – trade Bitcoin, Ethereum and Ripple
Want to Learn More About Trading CFDs?
- 3 easy steps to start online trading
- Five Important Tips for Ambitious Traders in 2018
- 6 essential steps for developing a successful trading plan
- 5 Things You Need to Know BEFORE You Start Trading CFDs