What is CFD Trading and What are its Key Advantages?

Many wonder what is CFD Trading so popular for, they know about leverage and no expiry restrictions, but little about its efficiency and increased flexibility.

Few really know what is CFD trading getting so much attention for, by seasoned traders involved in stock and currency trading. Trading CFD offers some unique advantages which go beyond cost effectiveness, tax benefits and high leverage. Though these are important too, the less obvious benefits have to do with flexibility and extra security through better liquidity. CFD contracts which are Contracts For Difference contracts do offer tax benefits to all kinds of stock and commodity traders. But the real benefits are in the fact that stock traders can trade any stock through CFDs even at times when there are short selling restrictions imposed on the market, stock traders cannot! The other key benefit is one way exposure to the open market. CFDs are simply contracts that follow the movement of the underlying asset, at high, one way beneficial liquidity. Being leveraged instruments they have a small daily interest rate being charged or credited to your trading account. That daily rate is charged or credited depending on if you are buying or selling the security in question, such a stock. This daily rate is essentially the interest for the buying power which leverage provides in the same way a loan would.

What One Way Exposure is

As every seasoned commodity and forex trader knows foreign currency trading on one pair impacts many other pairs, as well as possibly some related commodities. And these seasoned traders care about best opening price when opening a trade. And best filling price when closing a trade. What is CFD trading capable of offering is the one way ability to get the best out of the market through best possible price at any moment, since these contracts offer high liquidity. But they prevent liquidity shortages from flowing through and reaching the same traders. That’s why even CFD stock traders can deal in stocks in both ways, and short any stock they want, even at times when classic stock traders are not allowed to, due to short selling restrictions. These restrictions are imposed for few days at a time, during bear markets. But in the world of trading few days may mean missing the opportunity to make a lot of money. However, liquidity shortages are an everyday occurrence on the open markets, and they result in requotes and bad filling prices. Small costs that add up fast, and that’s one thing CFD trading prevents day in and day out in the markets.

Commodity traders love CFDs for trading precious metals such as gold. Affordable exposure, one way beneficial liquidity flow, and low dealing costs make CFDs the top choice for precious metal traders.

Seasoned Traders Rely on Serious CFD Trading

Seasoned traders are all kinds of experienced traders and market specialists. Some trade in outright, directional trades. Others use CFDs to hedge other open trades, such as long term stock investments. And there are those trading forex and commodities, these are usually specialists in one particular currency or commodity that they understand really well. CFDs are absolutely reliable for trading with up to very large amounts of money, and in many cases they are better than the underlying spot market. Because of the liquidity reasons we mentioned and the one way shielding they provide. Beyond all this, there are also clever ways to use CFDs for hedging purposes on real estate investments that utilize mortgages denominated in foreign currencies. As well as ways to reduce capital gains tax on such investments again with the help of CFDs. That is through intentional trading losses on CFD trades which are tax-deducted from one’s tax liability in one country. And yet fully hedged, dollar for dollar, but not taxed, through CFD trading in another country, tax jurisdiction or trading account.