Why trade CFDs?

When you trade a CFD you are trading the price difference between your entry point and your exit point. You don’t own the share, you are only counting on the price going up or down.
CFDs offers a trader the benefits of trading a share without the need to actually own them as well as other benefits. We go into more detail on benefits (and the disadvantages) later in the module, but in the meantime, let’s explore why a trader (or an investor) may want to consider CFDs.

So why should a trader trade with CFDs?

Flexible Trade Direction

This is one of the most attractive features of CFDs because it means you can trade both long (you expect the price to rise) and short (you expect prices to fall). This allows you greater flexibility with your trading strategies as you can now benefit or profit from a falling market.

Trade on Margin

This means that you only need a small percentage of your trading capital to open up a position (as you saw in our very simple example in What are CFDs?). Some CFDs only require as little as 1% margin, some 3% and other 5-10% depending on the underlying share and the CFD provider.

Diversification

You can access a wide range of global markets and you can trade a range of financial products allowing you to spread your risk by having diversifying your exposure.

Easy to Understand and Trade

Everything that you know about shares and share trading can easily be applied to trade CFDs because the price of CFDs moves as the actual share price moves. Unlike some other derivative, most CFDs don’t have expiry dates and are less complicated to trade than options.

Hedging

The principles of hedging are fairly simple, it is like taking out insurance to minimise your risk. Very simply, some CFDs can be use to provide a ‘hedge’ against the value of your portfolio going down.