It’s no wonder that so many traders are changing over from trading on the stock and other markets to using contracts for difference (CFDs). With the advantages that you have using CFDs, you’re much more able to project a successful financial trading future. To start with, there’s the enormous amount of leverage or gearing that you get for your money. You only have to put down a fraction of the price of the shares you’re interested in, and you get to keep most of the profit.
But another distinct advantage of contracts for difference is that CFD dealers will offer you an enormous range of financial products on which is CFDs are based, and apart from the issue of leverage, you would need to open accounts with several different brokers to access such a range. For example, you can trade CFDs on shares in many different countries. When you trade CFDs, you don’t pay any stamp duty, as you never own the shares, and this saves extra hassle and paperwork.
There is a cost associated with trading CFDs but it’s a small amount compared to buying the shares or other financial security. In the case of CFDs on Australian shares, you typically need around 10% of the share value in your account, and this is called the margin requirement. If you just want to trade on the Australian indices, you can get an even better deal and put down about 1% of the value.
Any time you hold a long CFD position overnight you will be charged interest. This is because you are effectively borrowing the rest of the money. For short-term trading it doesn’t amount to much, being just a few points over a commercial borrowing rate which when you consider it as a daily charge is minimal. But the fact you are charged interest means that you won’t generally want to use CFDs if you want to hold a share for the long-term.
Some brokers will also charge a commission, perhaps 0.1% of the contract value, but others will hide this charge in the bid/offer spread. If you’re trading in the short term, you will be looking for a much larger price move than this to make your profit, so again it is not a significant expense, and it is the cost of doing business in this way.
Why would you want to trade on Australian share prices? If you take a look at the international economic climate, you may be able to answer this question for yourself. To be confined to trading in your own country’s markets is extremely constricting. You are dependent on the health of the economy, and economies tend to go through cycles. Rather than making the best of a bad job, if you have access to international markets, particularly those that have a light relationship with your home economy, then you have a much wider range of opportunities regardless of the domestic economic issues. Just as when analyzing a stock market you choose the best performing stocks, with the addition of international markets you can start with the best performing country, and look for the strong stocks within that market.