For traders who don’t have the capacity to fund huge amounts on their trading accounts, Contract for Difference (CFD) offers a very good alternative. Trading CFD maximizes trading capital which in turn helps in increasing profits. CFD is mostly partnered with Forex trading and this approach has become quite popular for many years. Even brokerage firms are adapting to this type of trading and established negative balance protection offered to traders so as to limit incurring heavy losses that could result in a mounting debt in your trading account.
Here are some of the key benefits of CFD trading
More Leverage in Your Trades
Traditionally, trading instruments would ask you to commit 100% of your capital to your trades whenever you want to open a trading position. Let’s consider the standard way of how traders open a position. For the standard capital, you may want to have $1,000 for the stocks, therefore, you have to tie up the entire amount of investment.
But when you trade CFD, the margin requirement when you open a trading account is just 5% of the total value of the underlying asset. This means that you just need to secure a small amount of capital when opening a position, thus, increasing the chance of acquiring a profit margin. If you are planning to invest $1,000 for a trading position, you will only have to pay $50 as your investment. The remaining $950 can be allocated to other trading opportunities.
Earn in Both Bull and Bear Markets
No matter if it’s a rising or falling market, you can still open positions and earn from it. This goes to show that you can capitalize on all types of market fluctuations. Since CFD offers you great flexibility, traders get to control over their trades, how they open positions in the market, when and everywhere they should open a position.
Flexible Lot Sizes
Opening a CFD position exposes you to volatility. Because of this, a lot of brokers are offering flexible trading options on trade size. This has allowed brokerages to accommodate different types of traders particularly beginners who are looking for some trading strategies without exposing their positions to so many risks. As you acquire more trading experience, you can increase the lot sizes slowly.
Low Trading Costs
If you have tried the traditional trading methods, you will find it costlier than CFD trading. CFD usually gets their earnings from the daily percentage they got from financing the trading transaction. For instance, you want to open a $1,000 trading position. All you have to spend is $50 and not the entire amount. Then, the brokerage will be charging you a small fee for the $950 difference.
No Expiry Date
If you check other investment options, the value will depreciate over time. But with trading CFD, this won’t happen and there are also no expiry dates. There are also very few restrictions when closing a position compared to other types of investment like futures. Because of this, traders taking long positions need to be very patient.
