Share dealing has been a staple investor choice for as long as stock markets have been around. More recently the popularity of a different kind of share trading has risen with CFDs allowing traders to profit from price movement without them having to purchase the equivalent shares. Here’s an outline of the main benefits of CFDs over traditional share options.
A CFD (a contract for difference) is a form of derivative trading that allows anyone to trade on the prices of a wide range of global financial markets including stocks, indices, commodities and bonds. Because a CFD only lays down a security for those shares and not buying outright, it makes it an increasingly popular method of share trading.
How a CFD works
A CFD allows traders to profit from a price movement without actually owning the share itself, it is essentially an agreement to exchange the difference in value of any one share from the time the contract was entered to the time the contract ended. While this might appear similar to normal share dealing, the big difference is seen in the amount of capital needed to purchase that position.
You are not actually buying the stock
While it is similar to trading in stocks you are not actually buying the shares, you are buying the contract for that share position. The bottom line here is that in order to buy a large position in the market, it will cost considerably less than the capital required to purchase the equivalent in shares.
Access to more markets
Unlike playing the stock market, trading through a CFDs platform offers access to products from every market in the world including the DOW, NASDAQ, S&P 500, FTSE, DAX, CAC, NIKKEI, SHANGHAI, HSI and SHENZHEN. It also trades the fortunes of government bonds as well as commodities like oil, gas, gold, wheat and copper and offers index options on them all.
Commission fees are different
In normal share trading, when a purchase is made a commission fee is applied to the transaction by the broker – usually a set figure. However, as the full amount of shares aren’t purchased when trading CFDs, the fee structure won’t cut into the profits. That said, if the price spread is very small then potential profits are reduced and the fees will still need to be paid on the entry and the exit of the contract.
A CFD is a leveraged product
Leverage means that, for a smaller outlay, the potential to realise much bigger profits or losses are opened. A leveraged product like a CFD can enable the gearing of an investment, which can eventually mean controlling a much bigger position without having been required to pay the full capital for it.
CFDs manage to offer up all the great benefits of share trading with the huge advantage of enabling you to utilise unrealised profit. The fee structure can be less demanding than normal share trading as you won’t be actually buying the whole stock. But the big difference lies in allowing your capital to be leveraged against the collateral of only 5-10 per cent of the value of the share. CFDs might make any trader – experienced or otherwise – look twice.