Advantages of a CFD

Submitted by Stock Market News on 12 May, 2011 - 16:58

Why you should trade a CFD.

CFD is an agreement between a buyer and seller, to exchange the difference in value of a share between the time that is opened and closed. CFD allows you to trade in a range of markets without actually buying the share, and profit whether the market goes up or down. Traders can benefit from the change in stock prices without havign to pay for the full price. CFDs are also leveraged financial instruments,which means you can earn big profits for a small initial outlay.

CFD Advantages:

CFDs provide a higher leverage compared to traditional trading. Standard leverage begins at 2% margin requirement. The lower the margain requirement that less capital outlay, which in turn provides greater potential for profits.

CFD Brokers offer products worldwide. You can trade in any market, as long as that market is available on the broker's platform.

The CFD market does not have short selling rules. The underlying asset for a CFD can be shorted at any time. Since the trader doesn't actually own the underlying financial instrument, traders don't have to borrow or short costs.

You do not have to worry about commisions. CFD brokers don't charge a fee, and give the same order types as a traditional broker. Brokers make money by making the trader pay the spread instead. With this spread, traders have to pay the ask price and take the bid price. Depending on the volatility of the underlying asset of a CFD, the spread can be large ir small but usually it is fixed.

There are no requirements for day trading. Traders can trade as much and how often as they want. In traditional trading, depending on the market, there is a minimum amount of capital required before you can trade, and limited amount of day trades that can be made.

Traders have access to a variety of trading options. Stock, treasury, currency, index, and commodity CFDs. Apart from stocks traders can benefit from various financial assets.

With these advantages, CFDs are good alternatives from stock. However, trading CFDs involve more risks. They can work for but they can also work againts you. Although CFDs sound lucrative, there is a also a huge potential for loss. So before you decide to trade on a CFD be sure to know the pros and cons, and weigh your options. You can always diversify up to 6 stocks at any one time, so make sure you have other assets in your portfolio that you can look into.

CFD Fundamentals

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