CFD trading attracts the vast majority of people ranging from the scalper, intraday and long term traders, even major banks, hedge funds and the person on the street dabble with CFDs.
The reason why many different people trade this instrument is on the back of its many advantages. One key reason is that CFD trading provides a much higher leverage than traditional trading. One can trade with up to 200 times leverage depending on the asset. Such an advantage allows people to trade in the markets even if they have a limited amount of capital.
While generous leverage is one key advantage CFDs have, it is important to point out that it is also one of its disadvantages; traders will many times misuse the available leverage and might end up lose more than they expected.
Another major advantage that CFD trading offers is that there are no shorting rules that prohibit shorting. A trader can be free to short the markets at his whim without paying any additional charges. The main reason is because there is no real ownership of the actual underlying asset.
With all of these benefits and more, we will find many different people trading CFDs.
Getting a Better Lifestyle
Long gone are the days when you need a great deal of starting capital to generate a meaningful return on trading. Just 15 years ago, the possibility for the average man on the street to trade with leverage was limited. This means that going from a very small fortune to a sensible fortune took a much longer time. Today’s traders can open a trading account with as low as 50 US Dollars and still be able to generate a return on this.
While trading with a great amount of leverage is possible, it’s not advisable. The reason for this is because many people lose just on the basis of this, but the leverage is there and it’s available for anyone that can master it. With this in mind we may find the young student starting with a limited capital but the ambition to add to their trading account if all goes well. We can also find the established businessman with a large capital that decides to trade with a lower leverage.
Another interesting point in regards to this is that just a few years ago, it was almost impossible to open an account with less than 2000 US dollars, this is now possible.
While some trade on the side, others are tired of heavy hours, not enough sleep, and probably not enough time with family and friends, these people will opt for CFD trading. Others are looking for a passive income and return on their savings.
Others do it just for fun, they see the market as a puzzle, something intriguing. Markets swings are big and with an initial risk of maybe 500 US Dollars the trader might return 1500 to 2000 USD in a short period of time if the trend is on their side. As the options are limited to either buying or selling, these traders argue that the odds are better than gambling.
Hedging their Positions
Shares traders which hold physical stocks might be of the opinion that their holdings will peak and move lower in the near term. While this may be the case, if they still have a positive long-term view on their holdings they will probably not want to sell, as this might trigger tax payments.
Instead of letting their holding deteriorate in value they can lock in their gains by shorting the CFD contract of their holding. As an example they might be long term owner of Google shares but they expect price to drift lower over the next 3 months, if this is the case then they can short the Google CFD.
Any loss in the physical stock will be countered with a gain in the CFD product, and it’s natural to use a CFD as going short on the physical market is far more complicated.
Professionals Also Trade CFDs
CFDs are not only limited to the private investors, as CFD trading is usually cheaper than trading on the exchange, the reason for this is because commissions and spreads tend to be lower. Also as the private investor, the professionals would like to short a market whenever they want.
A third benefit is that by trading CFDs the professional gets access to liquidity that is not always available on the exchanges.