A Contract for Difference (commonly known as a CFD) is derivative product, which allows investors to trade on the open market, without the need to acquire the underlying product in order to reap the benefits. CFDs are a key element in the world of trading, as you can trade them within thousands of different markets. They allow you to have mass exposure across the board, opening up investment avenues around the globe. The following is an overview of CFD trading and what you need be aware of before you get started.
Long and Short Positions
CFD trading is versatile in the sense that it allows you to mix up your investing approach to incorporate both long and short positions. So, if you think that market prices are on the way up you can choose to go short, if you envision returns further down the line then you can go long. CFDs offer investors flexibility when it comes to trading on market movements, as you can benefit on a movement, no matter whether such is positive or negative.
CFD trading is a great tool for those who wish to hedge their portfolio should they envision a dip in the pipeline. If you see it losing its value, CFDs can be used to offset losses via short selling. It isn’t as simple as it seems to execute, but with a bit of knowledge CFDs can become a pivotal tool, especially when hedging your portfolio within a volatile market.
In terms of investments, CFDs rank as one of the most tax efficient currently on the market. This is circumstance dependent of course, but many can use CFDs to offset the losses you suffer against any Capital Gains Tax liabilities you may have. The tax efficient qualities of CFDs vary upon case to case, so it pays to speak to a professional about how CFD trading can work for you.
High Leverage Trading
CFDs are generally traded on leverage, which means investors only pay a fraction of the total trade value, rather than its full market cost. When trading on leverage your losses will be magnified, meaning poor planning could wipe out your funds. This means you need to take extra care when CFD trading. Leverage trading is a high risk, high reward system and you should understand such risks before you get involved. Speak to an independent advisor prior to CFD trading and get more information on the risks involved to see if your portfolio is strong enough to weather such. You should also enquire about the risk management tools available to you and how they can aid your CFD trading.
No Stamp Duty
CFDs are a derivative product, meanings that investing in them doesn’t ever constitute ownership of the underlying products. As you don’t own such product, you won’t be held responsible for the stamp duty that it incurs. This means that you save 0.5% on each CFD trade you make, which when taking into consideration can result in large savings. However, tax laws alter from nation to nation, meaning that you will need to research what applies to you when you are CFD trading.