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 THE ABC OF... |
More bang for your buck
Top 5 reasons to trade CFDs, and why you might even prefer to trade CFDs over shares at times.
1. Gearing up is easier
CFDs open the door to the little guy who doesn't have the big bucks at his disposal to make the big trades.
Some CFD providers will let you start trading with as little as $1,000 in your account. But the benefit of leverage means that a $1,000 deposit can be leveraged up to $20,000 on a CFD - which means that you can trade big capitalisation stocks (indeed, you aren't limited to trading penny stocks due to limited funds), or use the funds to diversify your trades across a number of different stocks, sectors or a variety of securities.
If you are a share fanatic, you can look to open a margin loan to leverage into share trades. The only issue with margin lending - as opposed to CFDs - is that margin lenders require at least a 30 per cent deposit before they'll lend you the funds to trade.
2. Make hay when it rains
You can "short" a CFD - sell it with the intention of buying it back at a lower price and profit from a price fall - just as easily and at the same brokerage as buying it. This little gem opens up all sorts of interesting moves - such as a popular hedge fund strategy called pairs trading - but more importantly means that trading CFDs can be just as profitable in bearish as bullish markets.
Share traders with big account balances and a trusted broker should be able to short shares as well - but the brokerage will be higher and not all stocks will be available to short.
Being able to short also means that you can use CFDs to hedge against losses in your long-term share portfolio. This means that when trouble strikes, you don't necessarily have to sell your shares - but instead, you can short-sell a CFD over them to protect your portfolio from temporary losses.
3. Markets that tickle your fancy
Share trading is limited to, well, just that, shares. But when unexpected events happen around the world, the resounding shockwaves aren't always restricted to the sharemarket. For example, an oil shock will certainly affect oil miners but will have an immediate impact on the crude oil price. Do you trade oil mining stocks or the crude oil price? While share trading is limited to just one option, CFDs allow you to trade both.
CFDs can be traded on international shares as easily as domestic shares, on domestic and international indices, commodities such as gold and crude oil, foreign currency and debt securities.
Trading all of these markets mightn't be something that you engage in regularly, but it's handy to have the tools available should the perfect opportunity present itself.
4. Small price moves are magnified
Few share traders will get hot and bothered over a three per cent price rise. Insignificant movements in price only become significant when the trade size is large - and this is where leverage comes into play.
A $10,000 outlay on a CFD can be leveraged to $100,000 - and at this level of exposure, a three per cent price rise generates a $3,000 profit. Based on the original $10,000 investment, we're looking at a 30 per cent return. Not bad at all.
In other words, small day-to-day price movements can become lucrative opportunities for profit - and equally loss - for the average CFD trader.
5. Order types galore
If you are prone to becoming emotional when trading, you like trading to a game plan or you simply don't want to be glued to the computer 24/7, then conditional orders are mandatory.
Conditional orders - stop losses, limit orders, day only, good until cancelled and trigger entry - are an important tool in trading CFDs, but are certainly not CFD-specific. Many online brokers offer the full range of conditional orders on both shares as well.
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