CFDs, a form of derivative contracts, offer traders the opportunity to wager on the changing prices of multiple markets, including commodities, indices, shares and even digital assets. CFD trading offers a range of advantages over traditional stock trading, including more excellent leverage capabilities, lower commission costs and improved access. Additionally, CFDs provide traders with more flexibility and the ability to have access to a wide range of markets and asset classes. This article will discuss why traders should consider trading CFDs instead of stocks.
One of the main benefits of CFD trading is the ability to use leverage. It allows investors to open positions much more significant than what their account balance is worth, enabling them to find more opportunities in the market. However, it is impossible to use leverage with stocks, so investors must invest with the total amount of available capital. In addition, with CFDs, traders can adjust their leverage depending on their trade size.
Lower capital requirements
Another benefit of CFD trading is that it generally requires a lower initial capital requirement than stock trading. It makes it easier for beginners to get started with less money and allows experienced traders to take advantage of opportunities with smaller funds. Additionally, as there is no ownership stake in the underlying asset when trading CFDs, traders do not need to pay any costs associated with buying or selling stocks, such as broker fees or taxes.
Low commission costs
CFD trades come with significantly lower commission costs compared to stock trades. In addition, most brokers charge a flat fee for all their trades and do not have minimum balance requirements. It makes it much cheaper to make many trades in quick succession and eliminates the need for investors to pay hefty commission fees when trading a significant amount of stocks. In addition, CFDs allow investors to open and close trades instantly, which is not possible with stocks. Before you start trading CFDs, you can consult with a Saxo CFD broker to learn more about their commission fees.
CFD trading also provides traders with increased accessibility compared to stock trading, as they can trade CFDs on a variety of markets around the globe. It allows traders to diversify their portfolios across different asset classes, regions and sectors without buying stocks directly from each market. Additionally, most brokers offering CFD trading platforms provide access to real-time price movements and allow traders to open and close positions quickly, making them even more accessible than traditional stock exchanges.
Low slippage costs
Slippage is the difference between the expected price of a trade and its actual executed price. CFDs are usually traded using market orders, meaning that trades are filled at the best available prices. It can help to keep slippage costs low compared to stock trading, as there is less chance of experiencing significant gaps between entry and exit prices due to liquidity issues or other factors. In addition, CFDs also allow traders to enter and exit positions quickly, which can help further reduce slippage costs.
No stamp duty
When trading CFDs, investors do not need to pay stamp duty on their trades. It can be a significant cost saving compared to stock trading, where traders must pay a fee for each trade they make. Additionally, no stamp duty is required when opening or closing positions with CFDs, which makes it easier and cheaper for traders to enter and exit their positions without worrying about paying additional taxes or fees.
CFD trading risks
While trading CFDs has several advantages, traders must also familiarise themselves with the risks. Knowing the risks will help them understand the potential for losses in addition to any fees and commissions involved with trading.
CFD trading involves using leverage, which can amplify gains and losses. Leveraged products are higher-risk investments, so traders must know how much they risk before entering a trade.
Short selling is when investors borrow assets to sell them in the hope that their prices will decline and they can take advantage of it. While this can provide traders with opportunities for high returns, it also carries significant risks, as the market could go against their position and this would result in substantial losses.
Volatility is another risk associated with CFD trading. The underlying asset prices can change rapidly due to changes in the market or events occurring globally. It can result in substantial losses for traders if they are not prepared and do not have the necessary risk management strategies.