The trading of Contracts For Difference is a popular way for investors all around the world to gain exposure to a wide variety of financial markets. It is one of the fastest growing forms of trading around the globe and brings about a number of key benefits:
Leverage. By trading on leverage you are able to take out high value positions with a small percentage of their worth. By doing so contract traders are able to maximise returns with relatively insignificant sums of money. If you thought that HSBC shares were going to increase in value and wanted to trade a contract in the company worth £50000, with a margin requirement of 10%, you would only need £5000 to do so.
Flexibility. Contracts For Difference allow investors to go both long and short. This differs to forms of investment such as share trading and means you can benefit from falling prices as well as rising ones. This increased flexibility also brings the ability to hedge. If for example you held banking shares and expected some data to be released that would adversely affect the banking sector, you could go long with a CFD and limit any potential loss.
Stamp Duty exemption. Share purchases incur stamp duty taxation of 0.5% of the value that is rounded up to the nearest £5. If however you use CFDs to gain exposure to a company, this tax will not be charged. This saving can be worth large sums of money depending on the volume you trade.
So as you can see, there are a number of key reasons why people trade CFDs. Leverage is by far and away the biggest attraction although many people are drawn to it due to the tax savings available and the flexibility it brings. No matter how experienced you are in investing, CFD trading is an important instrument and one you should definitely consider.
