Advantages Of CFDs
CFDs are considered to be attractive because they can be obtained with low margins, meaning that the potential for leveraging gains can be large.
For the average retail trader, enhanced leverage helps to maximise capital efficiency. In effect, small amounts of money may be used to control vastly larger positions in the market. Consequently, many trading strategies that were previously too expensive become potentially viable. Among the most popular are scalping, reversal, trend, dollar-cost-averaging and reversion-to-the-mean methodologies.
FXCM's lineup of share CFD offerings are prime examples of leverage at work. In the case of Tesla Inc. (TSLA.US), FXCM furnishes traders with robust buying power:
- Estimated Share Closing Price: US$1500.00
- FXCM Micronization: 1/10
- FXCM Contract Value: US$150.00
- Required Margin: US$30.00
After micronization, FXCM's required margin for buying or selling one share of TSLA.US measures approximately 2% (US$30.00/US$1500.00). The reduced capital requirements enable risk-receptive traders to buy or sell large blocks of Tesla Inc. without realising the US$1500 per share cost.
The modest initial capital outlay required for share CFDs warrants a strong risk management gameplan. Conservative money management, the use of stop loss orders and addressing risk to reward on a trade-by-trade basis are a few ways to limit market exposure. Although those that trade CFDs may realise extraordinary rewards, it's important to quantify and always be aware of assumed risk.
CFDs can be granted tax advantages in some national trading jurisdictions. In the U.K., for example, CFDs are exempt from the "stamp duty" charged on traditional equities trading. Any losses incurred with CFDs can be used to offset payment of capital gains taxes on profits.
Tax situations differ on a case-by-case basis, from basic to extremely complex. Futures, forex, options and stocks all have unique parameters, while CFDs may be used to simplify one's liabilities through trading targeted asset classes via a consistent transactional framework.
However, no matter what instrument(s) are being targeted, a trade or investment's time horizon is an integral part of determining tax liabilities. In many cases, proceeds from short-term positions are taxed at much higher rates than longer-term investments. Ultimately, the responsibility falls upon the trader to be aware of local tax laws and reporting duties.