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CFD trading allows you to speculate on the price movements of various financial instruments, such as stocks, indices, commodities, and currencies, with the added benefit of leverage. However, it also carries the risk of losses, and the prices of financial instruments can be highly volatile. In this article we will discuss what are the advantages and risks of trading CFDs.
There are many benefits which CFD trading offer to traders, compared to the traditional trading method. Here are some of the advantages of CFD trading.
Trading CFDs allows one to earn from “going short” as well. If you are anticipating a fall in prices of the assets you are trading for, you can choose to open a short CFD position by selling your contracts instead of looking for a new asset to trade. If you would like to close your trade, you buy back the same number of CFDs you had sold previously, at the prevailing rate. This means that if the price of the asset dropped, you would have profited. Unlike in traditional investing, CFD traders do not have to borrow anything to go short when trading. Thus, shorting CFDs do not incur additional borrowing charges.
As CFDs do not involve the physical delivery of an underlying asset, brokers can easily offer a wide variety of instruments to trade. Traders can choose to buy or sell any market offered by their broker, which includes forex, shares, indices, commodities and bonds – all with ease on the same platform. In addition, CFD traders also get some of the same benefits as traditional traders, including dividend payouts for shares.
Another advantage a trader can gain from CFD trading is leverage. Leverage benefits traders, especially new and young interested traders, as it allows them to open positions without paying for the full cost to trade that position. CFD traders will only need to pay a portion of capital known as margin to open that position and one can have its profits amplified depending on the leverage size of the trade.
On the other hand, it is crucial to also note that both the profits and losses are based on the full value of the position you are going for. It is important to consider using risk management tools such as stop-loss orders.
Learn more about leverage and margin here.
One other benefit CFD traders can gain is from the fact that you need not have to pay UK stamp duty when you buy and sell markets. This means lesser tax bills and therefore lower trading bills for traders. Hence this can be a gain for traders who are just starting out in trading and do not want to incur some much expenses in trading at the start of their trading journey.
However, there might still be some adjustment to tax laws which is something traders have to take note of when it comes to trading CFDs.
On the other hand, while CFD trading does offer advantages to its traders, there are also risks that traders should be aware of before engaging in this type of trading.
Even though traders can gain from leverage, it can also be a double-edged sword as it increases the potential for profits. CFD traders are usually required to deposit only a small percentage of the total value of the trade as collateral, which means that they can potentially lose more than their initial investment if the trade goes against them.
The use of leverage can amplify price movements and result in high volatility. This means that traders can experience significant price swings in a short period of time, which can be challenging to manage and can result in large losses.
CFD trading is regulated differently as compared to other financial instruments and this can expose traders to greater risks. For one, CFDs are traded over-the-counter, which means that consumers are not as protected as they might be when trading on an exchange. In the CFD industry, brokers have varying levels of regulatory oversight, and it is important to pick a regulator broker to trade with.
As compared to the traditional form of trading, CFD trading can be complex and may not be suitable for all traders. Hence, it would require a very good understanding of financial markets and the underlying assets that one is interested in trading. Because of the complexity of trading CFDs, it would be advisable for CFD traders to do more research so that one can accurately assess market conditions and make more informed decisions. You may want to start that by checking out PU Prime’s trading-related articles and market analysis content.
In conclusion, trading CFDs is not as straightforward and can be a high-risk, high-reward activity that is not suitable for all traders. While it can offer the potential for significant profits, it also carries the risk of substantial losses, especially if traders do not have a good understanding of the markets and the instruments they are trading. Learn how you can start CFD trading here.
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