Advantages of Investing in Contracts for Differences (CFDs)

Contracts for differences are a popular type of a financial derivative.  A CFD is an arrangement or form of futures contract where the differences or the settlement are done through cash payments instead of the delivery of physical goods.

If you want further diversification on your portfolio, CFDs are good tools you can use to this end.  You can enjoy plenty of advantages just by using contracts for differences. And we’re going to talk about those advantages in this article. Charts and Analysis Check them out!

Higher Leverage

This is one of the most popular perks traders enjoy when it comes to trading CFDs.  This kind of derivative can offer higher leverage than usual, normally, starting at as low as 2 percent and can reach as high as 20 percent.  This enables investors to enjoy large potentials for returns with just a relatively small capital outlay.

Dividend Payments

When you are a CFD holder, you can enjoy the benefit of dividend payments and other corporate developments at a fractional rate.

This is the reason why you should take into consideration possible future dividend announcements, especially when you are currently going short.  Dividends could have an effect on the value of your CFD positions and, more importantly, the amount of profit you may get from a specific transaction.

Global Market Access

Investing in CFDs has become largely easy to do investors around the world, since it’s available in many brokerages located in many countries.   Since CFDs are traded in global financial Market News and Charts, you can use what is called the Direct Market Access (DMA), which gives you the ability to deal with the global markets directly.

Shorting

If you want to try short selling in the CFD market, you are definitely free to do so.  This market does not have any rules that prohibit traders to go short on any kind of underlying asset.

CFD financial instruments can be used for short selling any time without borrowing or short selling fees.  That’s simply because the CFD traders does not have any real ownership of the underlying security or asset.

Hedging

As a way of risk management, investors try out various methods to veer farther away from risks and potential losses through a strategy called hedging.  For instance, you currently have a long position on a stock that is spiralling down at the moment and you’re in dire need of a help to balance the losses.  You can do that by opening a position in the opposite direction by shorting a CFD.

Then, the short position will generate gains for you as long as the prices continue to drop.  In other words, this hedge helps you reduce losses and even prevent future risks.

Caveats

Just like many other rewarding financial instruments, CFDs sport inherent risks and downsides that you should be familiar with if you’re serious about using this financial instrument.  You may incur significant losses if you don’t do it right since you’re using higher leverage. There are other downsides like high fees and costs when it comes to spreads.

Therefore, as a form of conclusion, we say you should dig deeper first into what CFDs are to know how they truly work for the investor or trader before you pour your money in them.