More Investors Choose CFDs over Stocks for Higher Leverages
Queensland, Australia. Thursday, June 22, 2017 — For many investors, stocks and bonds are comfortable and familiar. These choices do have their benefits, however looking into contract for difference (CDF) investments should not be overlooked.
A CFD is a tradable investment that mirrors the movements of the asset under it. Profits or losses are realized when the asset moves in relation to the position, however, the asset is never owned. A CFD is, in easy terms, a contract between client and broker.
CFDs are growing in popularity for many reasons. When purchasing a CFD, you pay your broker a 5% margin, instead of the general 50% margin with a traditional broker. When a CFD trade takes place, a loss will show equal to the size of the spread. While this is not the case in typical stock trades, the normal commission paid out to the stock brokers is not present.
With the commission and additional fees taken off the table, the payout to the trader is higher in most cases.
CFDs provide a much higher leverage than traditional trading. Leverage begins at a low as 2% margin requirement, and can (depending on shares and other factors) increase to 20%. This means less capital outlay, and greater return potential!
In addition to a higher potential return, CFD brokers use products in all the major markets. This allows traders to easily trade with ANY market that is open on their broker’s platform.
While there are different rules that prohibit shorting at different times, the CFD market generally does not adhere to these rules. Investments can be shorted at any time, since no ownership exists of the underlying asset… which means no borrowing or shorting cost.
CFD brokers offer the same order types as traditional stock brokers. These features include stops, limits, and even guaranteed stops, depending on the brokerage firm. Most CFDs do not charge commissions or any type of fees to enter or exit a trade, but do make their money through trader’s paying the spread. The spread may be small or large, depending on the underlying asset, but the spread is nearly always fixed.
Less fees and no commission charges are additional perks to utilizing CFD trading. CFD markets are not held to the traditional restrictions like minimum capital day trade amounts, limits of day trades, or other minimum deposit requirements. CFDs are not just locked to stock market traders, either. Stock, index, treasury, currency, and commodity CFDs are also open for trade purposes.
CFDs are rising in popularity, and the low margin requirements, ease of access to global markets, and no rules to trading options provides an amazing alternative for traders — and all with little to no fees on the end of the trader. CFD trading is an amazing alternative to traditional options and works for short and long term traders, but each individual should consider their personal trading plan and what works best with their portfolio.