A CFD is a contract between two parties agreeing to exchange the difference in the value of a
security, instrument or other asset between the time at which the CFD is opened and the time at which it is closed.
CFDs are extremely versatile products growing in popularity as a short term investment tool. They provide an
efficient way of maximizing your capital outlay and can help diversify your existing investment portfolio or hedge a
Some of the advantages of trading CFDs are listed below.
Advantages of CFDs
Speculate in both rising and falling markets
CFDs are derivatives based on an underlying
instrument, there is no ownership of the underlying asset, however they allow you to participate in the price
movement of the asset. This means you can potentially profit in both rising and falling markets. It is just as easy
to sell a CFD as it is to buy a CFD.
In a rising market you would look to buy a CFD and then sell at a later date. This is called ‘going long’.
In a falling market you would look to sell a CFD position first and then buy it back at a later date closing out the
position. This is known as ‘going short’.
Efficient Use of Capital
CFDs are leverages products enabling traders to
increase their exposure to an underlying asset with a small initial outlay. When you open a trade you only need to
deposit a percentage of the value of the position, this is known as margin. Your deposit will vary depending on the
value of your CFD position. Leverage can result in added gains should the market move in your favour, however it
also carries risks and can result in increased looses should your position move against you.
Hedging other Investments
The ability ‘go long’ as well as ‘go short’ with CFDs
means that they are a great tool for hedging and existing portfolio. They are cost effective alternative to selling
the portfolio prematurely and can be used to provide and ‘insurance’ against a price fall.
For example, if you have a long-term portfolio that you wish to keep, however you are of the view that there is some
short term risk to the value of the portfolio you could use CFDs to ‘hedge’ your positions. If the value of the
portfolio falls the profit you make on the CFDs will offset the losses in your portfolio.
Flexible contract sizes
The contract sizes of CFDs are often less than the
typical contract size of the underling instrument, this means you can gain exposure to the price movement of the
instrument without a significant deposit.
Access Global Financial Markets
CFDs allow traders access to a wide range of global
markets that would otherwise be difficult to access. CFDs make it easy to trade commodities like Gold, Silve and Oil
as well a variety of global indices without having to trade the futures contract itself.
You should allways consider your risk appetite and
investment strategy prior to trading leveraged products. Leverage can work for you as well as against you and can
magnify profits as well as losses. In the event of a significant move against you, you may loose more than your
initial deposit. It is also important to be aware that you do not own the underlying instrument over which the CFD
is based. Further information regarding the benefits and risks of CFD trading can be found in our Product