We’ve looked at what CFD trading is and how it works, but you may be wondering about the advantages of opening a CFD position rather than trading in the more traditional way. Let’s take a look at the reasons to choose CFDs.

Capitalising on falling markets

In traditional trading, you normally buy an asset in the hope its value will rise, so you can sell for a profit. However, with CFDs you can equally well take a view on an asset you expect will fall in value – known as going short.

As you’re simply taking a position on the direction you think a price will take, you can keep dealing even in bearish markets.

Thousands of markets

With traditional trading, you might have to use separate brokers specialising in different asset types, such as shares or foreign exchange. However, most CFD providers offer a diverse range of global financial markets, all together on a single platform.

With CFDs you can also trade on markets that are difficult to access in other ways. Stock indices, for example, can’t be bought or sold directly, but you can use CFDs to trade on their movements.

24-hour trading

Most markets have set trading hours. The FTSE 100, for example, is only open from 5pm to 1.30am (AEST) in the underlying market. Ordinarily, after it closes for the night, you’d have to wait until the following morning before you can deal.

You may, however, find that some CFD providers allow you to deal round-the-clock on certain markets. This means that, even if the market you’re betting on is shut, you can still open and close your positions.

Leverage

With conventional trading you generally need to pay the full purchase price of an asset up front. CFDs, however, are a leveraged product. So when you place a CFD trade your provider will ask you to put up a sum representing just a fraction of the total value of the position.

Leverage gives you a relatively large exposure to a market with just a small deposit.

Imagine you wanted to trade CFDs on gold:

• Without leverage, buying one ounce of gold might cost $800
• But your CFD provider only charges an initial deposit margin of 5% (Retail minimum requirement)
• This means you need to put down a deposit of just $40 to open a position on an ounce of gold

It is important to keep in mind that your profit and loss will still be calculated on the full size of your position.

The risks of using leverage

Leverage can work to your advantage when you trade CFDs, however it’s important to remember that both profits and losses are based on the full size of your deal.

This means they could far outweigh the size of your initial deposit. So leverage is a benefit of CFDs, but also its biggest risk.