Advantages Of CFD Trading Online

Contract For Difference, or CFDs, are a trading product where you benefit from movements in the stock prices, without having to physically own the underlying shares.

The reasons why they are popular trading products include the fact that they are traded with leverage, which in effect magnifies your trading results.

Also, they present many more shorting opportunities than is possible with share trading, so you can profit in falling as well as rising markets.

In summary, the advantages of trading CFDs include:

Leverage

This, as mentioned, magnifies your trading results. So if you have a profitable system that returns 30% without leverage, and has a 8% drawdown, then with say 10 times leverage, the system would be expected to return 300% with approximately 80% drawdown. If a CFD provider offers 10 to 1 leverage (10% margin required), then you can use leverage this way.

Of course, you do not have to use the total leverage offered by the market maker.

Ability to go short on more stocks

The ability to go short with ease gives you more trading opportunities, and hence, assuming a profitable system, will allow you to profit in falling markets. With any particular CFD broker, not every CFD will necessarily be able to be shorted. Check with each broker that you’re considering their list of current shortable CFDs, if they this is available.

The specific CFDs on these lists may also change from time to time.

Ability to place stop loss orders

With most market makers, you’ll be able to place stop loss order that are automatically filled. This means that you’ll be able to do intraday exits, and have them performed automatically, rather than having to exit the next day if your stop is breached, or having the possibility of using emotion and discretion (for those trading mechanical systems) getting in the way.

It also means it is easier being in many positions at once, as this leg of the trade is automated. Though this is the case, you should always check to see that the trades you’re supposed to be exited from, is actually exited.

Profit from smaller moves

Because of the use of leverage, you can profit from smaller moves in the market and movements over shorter time frames. For example, without leverage, you may have to wait for larger moves and over longer periods of time, to profit from markets, especially to overcome the fixed costs of trading such as commissions. With CFDs, assuming a good system, you can profit from the market in a shorter time frame.

This is especially true if you can keep the transaction costs of CFD trading low.

Ability to place orders out of hours (for some providers)

With some CFD providers, you can place your orders in the evenings when the market is closed, such as orders to enter a new position, or to adjust a stop loss. This is convenient for those who are working or are otherwise busy during the day, and can’t get to the computer screen during market hours.

General note about dividends:

With most CFD brokers, when you are long a position, and the underlying share goes ex-dividend, then you will be credited the dividend. If you are short the position, then you will be debited the dividend.