Benefits of trading Contracts for difference
CFDs are derivative products that offer distinct benefits including:
1. Liquidity
2. Traded on margin
3. Traded long or short
4. Traded online
5. Low transaction cost
6. Access to international markets
7. Benefits from dividends
1. Liquidity
CFD prices are obtained directly from the underlying market. Meaning CFDs give you access to the liquidity in the underlying market, plus liquidity offered by the Contract for difference provider. More often than not there is much more liquidity in the CFD market than in the underlying or physical market as a result of the higher number of participants including private and institutional traders.
2. Trade on margin
Contracts for difference are traded on margin, typically from 5-10% to for shares and 1% for indices. Meaning a more efficient use of your capital as you only need to allocate a small percentage of your funds to secure a trade. This also enables you to magnify the returns on your investment with a much smaller capital outlay.
3. Trade long and short
Before Contracts for difference, short selling a stock could only be done through a traditional broker that would charge hefty fees on top of the normal brokerage. With Contracts for difference traders can now go short any position or market without any extra cost. Selling is as easy as buying with Contracts for difference.
Short selling also provides another benefit which was not available before. Your CFD provider will pay you interest on a short CFD position. This is similar to earning interest on your bank account balance.
4. Trade online
With an estimated 13.4 million Australians with Internet access online share trading has also been on the increase, giving traders more control and constant access to their positions. Most CFD providers offer free software and CFD trading platforms that allow traders to place orders online even outside normal trading hours.
5. Low transaction cost
Trading Contracts for difference can cost you as little as $10 each way compared to traditional stock brokerage rates of around $25-30. Although transaction costs are a small portion of your overall trading cost, they have an effect on your bottom line once the quantity of your transactions increases.
6. Having access to international markets
CFDs open up a variety of trading instruments. Most Contract for difference providers offer Contracts for difference on Australian and International shares, indices, sectors, commodities, foreign exchange and treasuries. Most of these markets weren't available or accessible to private traders before because of the complex nature or complicated set up of traditional brokerage accounts.
7. Receive benefits of dividends and stock splits
As CFDs reflect the price and movement of the underlying physical share, they also mirror any corporate actions that take place in the underlying share. This means, if you're a holder of a share Contract for difference, additionally , you will receive dividends and stock split benefits once they become due. However, you aren't entitled to any voting rights or franking credits. On the same vein, when you're short a share CFD and the underlying stock goes ex-dividend, you have to pay the dividend amount as you would if you were short the physical share.
Author Resource:
You can find out more about CFD trading trading with Australia's largest and most popular CFD broker IC Markets, by reading our articles on CFD education including guides and ebooks, all of which you can download for free.
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