Research & Tools
Advantages of CFDs
All the advantages and more.
While CFDs have been around for over a decade now, their popularity has increased immensely in the past 5 years. Aside from the traditional benefits that you get from traditional products such as stocks, bonds and commodities, CFDs on these products provide you with much more advantages such as leverage, flexible trading hours, lower costs as well as a larger product offering on one single platform.
Advantages of CFDs on FX, Commodities, Indices, Bonds, ETFS and Funds
- Large product offering
- Leverage
- OTC Market
- Low stop-out level
- Hedging
- Flexible lots
- One platform
- Mobile
- Cash settlement
- Flexible trading hours
- No expiration
- Go short or long
Leverage
In traditional investing, you as the investor are required to put down 100% of your capital for every financial product you purchase, whether it is stocks or mutual funds. For example, if you were to purchase 100 shares of Apple at $100 per share, you need to have $1000 plus comission fees readily available in your account. However with leverage, you only need a certain % of capital for purchasing the same amount of stock. With 30 to 1 leverage, the same amount of Apple shares would only require $1000/30 = $33.33 plus comission, meaning the $966.66 dollars in your account can be used to hold other positions. However it is important to know that leverage is a double edged sword and while it allows you to commit to larger positions, losses can magnify as well when the market move against you, so position sizing and risk management is extremely important.
Go short or long
With CFDs, you can go long or short a product simply by buying or selling. In traditional trading, you can only go short by opening a margin account or by purchasing derivatives such as put options or selling call options. CFDs simplifies the entire process or shorting if you feel a financial product’s price is down trending and want to wager on it. Furthermore, with greater flexibility, traders can close their short positions at any time with no limitations (assuming the market is open for such an instrument).
Lower costs and flexible lots
OEXN has very competitive trading costs in the FX/CFD industry. For most of our instruments, spreads are under 10 pips and average out to be roughly 0.01% of the contract size in terms of cost. Furthermore when you are trading instruments such as stocks or bonds, CFD trading allows you to trade a fraction of the share , so you can buy 0.1 share of Apple and are not limited to 1 share minimum. Another great advantage is that you can easily hedge your trade simply by selling or vice versa when the market becomes volatile. However it is important to know that exiting out of a hedge is very tricky for novice traders.
**Caveats when trading CFDs
There are pitfalls and risks involved when trading CFDs. As a trader, you must understand that you could lose more than your initial investment when when trading CFDs. This happens if the market gaps against you and your account reaches a negative balance. Furthermore, overnight swaps tend to be higher for CFDs on certain products.
