A contract for difference(CFD) is a contract between a buyer and seller deriving value from an underlying set of assets. CFD stands for ‘Contracts For Difference’. This means that you never own the asset, but its value can be represented in your account balance. The difference between what you paid to obtain the position and the selling price will determine how much capital you make or lose on any given day. This is referred to as “mark-to-market” accounting.
The following 12 reasons are why CFDs are better than stocks:
1. Increased liquidity
When you trade stocks, you’re trading security representing fractional ownership in a company. This means that there are only a limited number of shares available, and when someone wants to sell their shares, the stock price goes up. With CFDs, on the other hand, you’re essentially trading the currency pair and not the underlying asset. This means that you have access to increased liquidity as there are no restrictions on how many CFDs can be traded at once.
2. Lower spreads
Trading stocks also involves paying a commission to your broker. On the other hand, CFDs charge much lower spreads, which can result in significant savings over time.
3. No need for a broker
With CFDs, you can trade directly with the market maker without the need for a middleman. This saves you money and also eliminates the risk of your broker going bankrupt.
4. No restrictions
Unlike stocks, there are no restrictions on who can trade CFDs and when. This makes them ideal for traders of all experience levels.
5. Increased leverage
You’re typically limited to a 2-to-1 or 3-to-1 leverage ratio when trading stocks. With CFDs, however, you can get up to 500-to-1 leverage, which gives you the potential to make significantly more profits (or losses).
6. 24/7 trading
Unlike stocks only traded during specific hours, CFDs can be traded 24/7. This gives you more flexibility when trading and allows you to take advantage of market opportunities no matter what time of day it is.
Trading stocks can be risky, especially if you only invest in a single company. By trading CFDs, however, you can spread your risk across multiple currency pairs, which reduces the overall risk of your portfolio.
8. No restrictions on shorting
You can’t short sell stocks unless you’re a margin trader. With CFDs, however, there are no restrictions so that you can profit from falling prices just as quickly as rising prices.
If you’re worried about the prospect of a stock price decline, you can use CFDs to hedge your position. This will protect your portfolio against significant losses in the event of a market crash.
10. Tax benefits
When you trade stocks, you have to pay capital gains tax on your profits. With CFDs, however, there is no such tax, and you can keep all the profits you make.
11. Multiple markets available
There are multiple underlying assets to choose from. In addition, some brokers offer access to Forex and commodities and indices, bonds, etc. You can even be long or short equities through CFDs too. On the other hand, only shares are available for purchase (and sometimes warrants). This limits your options considerably when deciding what positions to take.
12. Optimal trading platform
Most brokers who offer CFD accounts will also provide an online or downloadable trading platform that can be used at your convenience. These platforms have everything you need in one easy-to-use interface, with advanced features for experienced traders looking for reasons not to use stock trading. You can open and close positions by simply clicking the mouse button, which means no keyboard inputs are needed.
There are many reasons why CFD trading is a better choice than stock trading. With increased liquidity, lower spreads, no need for a broker, and 24/7 trading, CFDs offer traders more flexibility and opportunities than stocks ever could. Additionally, hedging and tax benefits make CFDs an even more attractive option for investors looking to limit their risk and maximize profits.