Why you should be trading CFDs
Trading CFDs has become crazily popular in recent years thanks to the emergence of tools that can make all different kinds of trading easy and relatively straightforward. Companies like oanda.com help traders gain a competitive edge.
CFDs, however, are a little more shrouded in mystery, and so in this article, we’ll be giving you an overview of what a CFD is and why they should be your next trading target, as well as some helpful CFD trading tips and tricks.
What is a CFD?
In short, a CFD (or ‘contract for difference’) is an agreement between two parties to exchange the difference in the value of a particular asset between the time at which the contract was made and when it expires. This can be done with pretty much any asset that can be traded, including stocks, shares and commodities. In other words, it’s a way of betting on an asset without actually owning it.
One advantage of trading CFDs over these assets directly is that you don’t have to pay the full price of an asset upfront. Instead, you only need to put up a small deposit known as a margin. This makes them ideal for day traders who want to take quick profits on small price movements.
Why trade CFDs?
CFDs have become super popular because they allow you to operate in a generally neat tax-efficient way as traders only pay tax on their capital gains instead of their income tax.
Another reason is that you can use leverage, meaning that you can trade with more money than you actually have in your account by borrowing some from your broker.
Be aware that this also amplifies your losses, so it’s important to use stop-loss orders (more on these later). Finally, many brokers offer free demo accounts which allow you to test out your strategies with virtual money before putting any of your own money at risk.
What are the biggest pros of CFD trading?
CFDs offer many advantages that have made them a popular choice among traders. Here are some of the biggest pros of CFD trading:
- You can trade a wide range of assets: CFDs allow you to trade not only stocks and shares but also commodities, indices, currencies and even cryptocurrencies. This gives you a lot of flexibility when it comes to choosing what to trade.
- You can use leverage: one of the most significant advantages of CFD trading is that you can use leverage to trade with more money than you have in your account. This can amplify your profits but also your losses, so it’s important to use stop-loss orders to limit your downside.
- You don’t have to pay stamp duty: unlike other types of trading, you don’t have to pay stamp duty on CFDs which means you can keep more of your profits.
- You can trade short or long: with CFDs, you can take either a long or short position on an asset giving you more flexibility than if you were buying the asset outright.
- CFDs are tax-efficient: in most cases, you only have to pay capital gains tax on your profits rather than income tax, making them more tax-efficient than other types of trading.
CFD trading tips
Now you know what CFDs are and why you might want to trade them, here are a few tips to get you started:
- Use stop-loss orders: as we mentioned earlier, leverage can amplify your losses as well as your profits, so it’s important to use stop-loss orders to limit your downside. A stop-loss order is an instruction to your broker to sell an asset automatically if it falls to a certain price.
- Know when to take profits: it can be tempting to let your profits run, but sometimes the market can turn against you very quickly, so it’s essential to know when to take your profits. A good rule of thumb is to set a profit target of at least 2% per trade
- Manage your risk: as with any kind of trading, it’s important to manage your risk by only investing an amount of money you can afford to lose. It’s also a good idea to diversify your portfolio by investing in different assets and markets.
- Use a demo account: as we mentioned earlier, most brokers offer free demo accounts which allow you to test out your strategies with virtual money before putting any of your own money at risk. This is a great way to learn about CFD trading without any financial risk.
- Do your research. Finally, it’s essential to do your research and understand the risks involved before you start trading. This includes understanding the different types of orders (e.g. stop-loss orders) and what kind of leverage is available.