Benefits of trading CFDs

Find out more about this flexible form of trading.

Contracts for difference, or CFDs, are a form of derivative in which you buy a contract to exchange the difference in price of an asset from when your position is opened to when it is closed.

Here are six reasons why CFDs are popular with traders.

1. Trade a huge range of markets

You can use CFDs to trade over 15,000 markets, including shares, indices, commodities, forex, options and more. And you don’t have to access multiple different platforms to trade different markets. Everything is available under one login, wherever you need it – you can trade via your web browser, your phone or your tablet.

You can even trade some markets outside of trading hours, to make the most of company announcements. Just keep in mind that the market’s opening price may differ from its out-of-hours price.

2. Leverage

CFDs enable your investment capital to go further, as you only have to deposit a fraction of your trade’s full value to open a position. The deposit you’ll have to put down is called margin.

How much you’ll need to deposit depends on the size of your position, and the margin factor for your chosen market. So if Apple has a margin factor of 5%, then a position worth US$10,000 may only require a deposit of US$500.

However, it’s important to remember that your total profit or loss is based on the full size of your position, not your deposit. Take the above trade as an example:

 

CFD trade

Traditional trade

You deposit

US$500

US$10,000

Your Apple position rises to US$10,250

You make US$250, or 50%

You make US$250, or 2.5%

Your Apple position falls to US$9750

You lose US$250, or 50%

You lose US$250, or 2.5%

 

As you can see, both profits and losses are amplified – and you can even risk losing more than you deposited.

3. Going short

Because a CFD trade consists of an agreement to exchange the difference between the opening and closing price of your position, it is more flexible than other forms of trading. This allows you to trade on markets that are heading down as well as up.

When you trade CFDs on a trading platform, you’ll see two prices listed: the buy price and the sell price. You trade at the buy price if you think that the market is going to go up in price, and the sell price if you think it is going to go down in price.

4. Similarity to the underlying market

CFDs are designed to mimic trading of their underlying market fairly closely. Buying an Apple share CFD, for instance, is the equivalent of buying a single share in Apple – if you want to buy the equivalent of 2000 Apple shares, you’d buy 2000 Apple share CFDs.

Buying or selling a forex CFD, meanwhile, is equivalent to buying a certain amount of base currency by selling the equivalent amount of quote currency. So buying a single CFD on AUD/USD would give you the same exposure as buying A$100,000 in US dollars.

So if you’re already experienced in non-leveraged markets, CFDs can be more immediately familiar than other forms of leveraged trading.

5. Hedging

Say, for instance, that you own a number of shares in HSBC, and you plan on holding your shares over the long term. You believe that the banking sector may be in for a downturn, and you want to offset any potential losses using CFDs. So you open a short position.

If you are correct and your HSBC shares drop in value, then your CFD position will earn you a profit, offsetting your loss. If your HSBC shares increase in value, then you can close your CFD position – and offset the loss you incurred against future profits for CGT purposes.

6. DMA

Direct market access, or DMA, enables you to see and interact with the order books of stock exchanges and forex providers. Instead of trading at the buy and sell prices offered by IG, you can see all the available bid and offer prices at any given time, and trade at market prices you choose.

When you trade using DMA, there’s no IG spread to pay – instead, DMA trades are charged via commission. While it can be a powerful tool, there’s no guarantee that you’ll find prices that are better than the prices we offer, and it’s only recommend for experienced traders.

Learn more about trading CFDs with IG

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