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 five reasons why CFDs are popular with traders.
CFDs enable your investment capital to go
further, as you can open a position by depositing only a fraction of its full value. For example, a CFD position worth $1000 may only require a deposit of $100, if the margin rate is 10%.
However, it is important to remember that your total profit or loss is based on the full size of your position when it is closed. Both profits and losses will be amplified, so your losses could end up exceeding your deposits.
2. Offset your losses
As you never own the underlying asset when trading CFDs, you won’t have to pay stamp duty. And since you can offset any losses against profits for your capital gains tax liabilities, CFDs can be a great way of hedging.
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.
Direct market access, or DMA, enables you to see and interact with the order books of exchanges and forex providers. So you can see all the available bid and offer prices at any given time, and trade at market prices with no IG spread. Instead, DMA trades are charged via commission.
5. Trade online
You can use CFDs to trade shares, indices, commodities, forex, options, and more on a single platform. 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.
Learn more about trading CFDs with IG