The stock market is a complicated and unpredictable place, but that doesn’t mean you have to give up investing in getting the most out of your money. Contracts for difference (CFDs) have become one of the more popular forms of binary options trading on the market today. They offer a simple way for anyone to trade in stocks while avoiding the more complicated aspects of buying individual equities outright.
Eight benefits associated with using CFD trading
Here are eight reasons why you should consider using contracts for difference as a form of investment:
1. You can trade from anywhere
One of the most significant benefits associated with using contracts for difference as your preferred form. Of binary options trading is that you can access these markets from any location, at any time. No matter where you are located in the world, if you have computer and Internet access, then you’ll have no problem placing some trades here instead of on stock exchanges.
2. There’s less risk involved
In addition to starting small when investing via CFDs, there’s also far less risk involved with this style of trading. Because you are not purchasing shares of stock, there’s no real downside to your investment. Even if you have a bad day in the market, you will still retain the entirety of your initial investment.
3. You can go short or long
Unlike other investments where it is impossible to see things from the opposite perspective. CFD trading allows you to place both long and short trades on stocks at any time. This type of flexibility makes it easier for people who are new to trading, in general. To get started trading this way instead of with traditional stock exchanges.
4. You don’t own the underlying asset
While many investors believe that their money is tied up while they hold onto individual equity, the truth is that only a small fraction of your invested capital is tied up in any one trade. The remaining portion is available to you at all times, which allows you to easily withdraw funds as needed or reinvest them into new trades when necessary.
5. You can use margin
Most brokerage firms that offer CFD trading also allow you to use borrowed money, known as margin funding. This is a great way to increase your profits exponentially; however, it does come with more risk than simply using the cash on hand for every trade made. Keep this in mind before deciding whether or not to make use of this investment tool.
6. You can protect yourself
While many investors believe that they are protected against losses by holding onto individual equity, the truth is that there are far more ways for your investment to go wrong than simply dropping in value. The best example is the 2008 market crash; many investors lost everything because they believed that their shares could not drop below a specific price – and they were incorrect.
7. You may receive dividends
One of the benefits of holding onto individual equity is that you can collect dividends and then reinvest them later. CFDs don’t offer this benefit; however, some trading platforms provide automatic dividend reinvestment as part of their standard services. This makes it easier to make money on these trades over time instead of waiting for payment before buying more equities.
8. You can trade multiple markets
While you’re limited to taking either long or short positions on single equity with traditional stock trading, CFD trading allows you to take positions on thousands of different assets from all over the world. This type of flexibility is great for those who have a global investment strategy and want to diversify their portfolio as much as possible.
Is CFD trading riskier than stock trading?
Leverage adds extra risk because price moves in the market. You are trading will represent a larger percentage of the margin you have deposited than if you paid the full amount.
For example, if you have deposited 10% collateral for an equity trade, the share price only needs to fall 10% for you to lose your entire deposit. However, more funds can always be added to cover margin calls, offering some flexibility if used carefully. In some circumstances the losses on a trade can exceed the funds that were deposited for margin, creating extra potential risk.