There is no denying the fact that Contract For Difference(CFD) has become quite popular over the past couple years in countries like the UK, Australia, and Singapore even though they are not permitted in the United States. Well, there are a couple of reasons why they are becoming a choice over the conventional stock investing and in this post, we shall be taking a look at precisely that.
2 Reasons Online CFD Trading Is Different
Firstly, CFDs just need the investor top pay a small margin fee instead of the entire value of the investment. For instance, if a person is considering an investment of 400 shares in a particular corporation and the current stock price is $2, and then a typical stock investor would have to chip in $800 to establish their position. On the other hand, if he or she were engaged in online CFD trading, then they would only have to pay the margin required which could be as low as 10 percent. This means that they would only have to chip in $80 for their initial investment.
Well, as attractive as this benefit may be, it has a risk that you need to be aware of. If the price happens to drop, then you might end up owing more money that the initial amount you invested.
The second reason contracts for difference tend to be more popular than regular stocks trading has to do with tax advantages. However, this may vary from country to country and applies in some of the countries. Where these benefits apply, the UK for instance, you don’t have to pay tax on buying shares with CFDs as opposed to the conventional stock investing.
Short Positions Are Allowed
The other reason Online CFD trading is getting more popular than traditional stocks trading is because CFDs allow people to take short positions in stocks. What this means is that you can make money from falling prices. Instead of buying $60 and selling at maybe $100 to attain a $40 profit per share, a short position will work the other way round. In this case, you would sell the stock at maybe $100, and if things go well, and the price falls to $60, then you would go home with your $40 profit.
If you are a novice in online CFD trading, then it would be a good idea to make sure you understand the above concept. Shorting stocks can be a tricky thing especially if you are a beginner, but it’s not that hard to get used to. All you need to do is know and understand what you are doing, and you will find shorting to be relatively easy.
These are the most common reasons why most investors and traders prefer Contract For Difference over the traditional stocks investments. If you want to venture on CFDs like many people out there, then take your time to learn and understand the various concepts before you jump in and whether it is permitted in your country. Also, take the time to choose a CFD trading program at https://www.xtrade.com/ and practice your skills for a while. Do not rush as CFDs tend to have many additional risks compared to general stock trading.