By trading CFDs, investors can receive the benefits associated with owning a security without actually possessing that security. Investors can harness these contracts to take long or short positions, speculating on the underlying asset's future price movements. Alternatively, they can use these contracts to hedge their portfolios, helping to manage different kinds of risk such as downside risk.
These contracts also provide leverage, allowing investors to potentially generate more robust returns. Investors who trade these contracts using leverage may only have to put up a small fraction of the contract's cost, so they can potentially generate a stronger return on investment.
Harnessing leverage can also allow investors to trade CFDs with a much smaller capital outlay. Leverage limits on the opening of a position between 30:1 and 2:1, depending on the currency pairs and price volatility of the underlying asset. Investors should keep in mind that leverage is a double-edged sword. While it can greatly amplify one's profits, it can also dramatically amplify their losses. Trading CFDs with any amount of leverage may not be appropriate for all investors.
CFD trading comes with low fees. When buying, a trader pays the ask price. When selling or taking a short position, a trader pays the bid price. The spread between these two is generally fixed, and its size depends on the volatility of the underlying asset.
No Stamp Duty:
When trading CFDs, investors are not obligated to pay a stamp duty, because these contracts are a type of derivative. As a result, investors that opt to trade CFDs may avoid the generating the tax liability they would incur by trading other securities. Investors should keep in mind that tax laws can change. Because every trader has unique circumstances, they may want to speak with an appropriate tax professional to get clarity on any questions.
CFDs are traded 24 hours a day, 5 days a week. Even if an underlying markets is closed – the stock market, for example – an investor can still trade CFDs based on major stock market indices.
While CFDs offer investors all the benefit associated with owning a security without actually having to possess it, they also come with all the risk associated with holding that security. CFDs offer traders the ability to use significant amounts of leverage, but leverage can dramatically amplify losses.
Why Trade With FXCM?
We're a leading provider of not only forex, but also CFDs, which means trading with us will provide access to benefits that only a top broker can provide. These include:
- Get 24/5 service on demand at any time
- Free premier education: With on-demand lessons, webinars and real-time instruction, you have all the training you need at your fingertips
Additionally, you can trade on our proprietary Trading Station, one of the most innovative trading platforms in the market. Open a free forex demo account to start practicing forex trading today.
While we pride ourselves in offering access to our proprietary Trading Station, we remind clients to consider whether they understand how CFDs work and whether they can afford to take the high risk of losing their money.