CFDs (Contracts for Difference) are an agreement between two parties, individuals, brokers or brokerage services to exchange what is the difference between the closing and opening price of a trade contract. They are classified as a derivative product that allows you to trade on live market movements, without owning the base-level product. CFDs are most commonly used to speculate of future market movements, no matter whether such movements are positive or negative. You can go short to profit off a falling price or hedge your portfolio in order to offset any future potential losses. CFDs provide an alternate to general trading, but you may be asking how exactly you trade CFDs? Thankfully, this guide is on hand to help.
Should you choose to trade CFDs, versatility is what you are likely to encounter. Right off the bat CFD trading allows you to go both long and short. If you have confidence in your investment and belief that the market prices will escalate, then you can go long and stick by your picks as per usual. However, should you feel that losses are on the horizon and want to get out before the dip, then you can use CFDs to sell as soon as you wish, in order to allow you to maintain a profit or minimised loss margin.
CFDs also offer a security element in terms of portfolio protection. If you believe that your portfolio may be about to face a negative impact, then you can short sell to offset losses. In fact, many investors trade CFDs in such way in order hedge their portfolio, especially in times high market volatility.
No Stamp Duty
CFDs are a derivative product, meaning that you won’t need to pay any stamp duty should you trade CFDs, as you don’t actually own the underlying product. Ultimately, this means you will save 0.5% on each CFD trade you make. However, it doesn’t make such trades fee free as tax laws change from country to country and circumstance to circumstance. It should also be noted that even though UK CFD trades are stamp duty free Irish stocks are not, and a 1% charge of trade value is due on execution.
Depending on your trading platform, you can trade CFDs twenty-four hours a day seven days a week. It means if you are a trader on the go who likes to stay connected, then CFDs are a trading option that can keep you on the move and help create turnover for your portfolio.
Simple and Effective
The act of trading CFDs has never been any easier, as global access via web-based trading platforms, no day or shorting trading rules and minimal fees has made it an appealing trading format. Long and short-term investors are the ones who are considered to be the core target audience for CFD trading. But, each individual can weigh and up the costs themselves to see if they can benefit from becoming someone who trades CFDs. CFD trading as a whole can work to further an established portfolio or help create one from scratch.