Contracts for difference are a very popular financial product, and there are a great many benefits associated with using them. They are quite different to standard trading methods, which is what makes them attractive. Here are the top reasons that you should consider if you’re thinking about making the switch to this useful way of trading:
CFDs are Simple
CFDs are a relatively simple product to understand, but they are most simple because they completely remove the need to own the underlying asset. Whether you’re speculating on gold or dollars, you never actually need to deal with the item itself – the CFD simply mirrors its performance. In simple terms, a CFD is a contract in which the buyer and seller exchange the difference between the price of something when the position is opened, and the contract time at which point it ends.
CFDs are Often Tax-Free
The product was originally invented in the United Kingdom, where certain over-the-counter transactions are classified as gambling and earnings from them are generally tax free. It’s important to note that CFDs are not legal in some jurisdictions around the world, including the United States, so it’s always worth checking before opening an account with a broker like CMC Markets. It’s also paramount that CFDs are not treated as gambling – they should be subject to all of the same considerations as anything else.
CFDs use Leverage
Leverage, or trading on a margin, means that you don’t have to deposit the full amount of what you’re trading with. Anything you do put in can often be geared up, which means that you can command a larger capital with little outlay. This of course means that your profits will be considerably higher when you are successful. It’s important to note that leverage should be used to increase flexibility rather than handling more money than you can afford, as losses can exceed deposits if prices move against you.
CFDs are Flexible
Because you’re not tied to an actual asset, CFDs offer a very flexible form of trading. There are countless different products that they can be used with, and you can go short or long on any of them, meaning you can profit from whatever might be about to happen. Whether you’re looking to trade forex or commodities, the chances are, you can use a CFD to get the best out of it. Indeed, many traders will exclusively use CFDs because of this.