The ‘Contract For Difference’ trading has gained popularity in the recent years due to the obvious benefits it bestows over the direct transactions trading methodology. Be it the stocks trading, forex trading or even the commodities trading, the CFD form of trading has certain points to score over the conventional direct transactions trading, which we are here to uncover about. But, before discussing its benefits, let us first understand what CFD trading is.
CFD trading – what is it?
As the name clearly implies, here, a contract, to act upon the differences in the price value of the interested financial instrument or the product is agreed between the buyer and the seller. That is, say for example you have invested in oil CFDs and, at the end of the contract period, the oil market has really performed well and therefore, the current price values are higher than what you had at the time of buying CFDs or at the start of the contract. Under such circumstances, you are bound to enjoy the profit, that is the difference in the price value, which would be paid to you by the seller.
The benefits - uncovered
But, unfortunately, if the market has crashed then, the resulting negative difference will require you to pay the difference price value to the seller, which is nothing but loss to you. Whatever might be the product or the financial instrument value at the end of the contract period,
one thing that is sure is you need not physically own the asset and rather indulge in trading only by speculating, which is indeed a welcoming factor in CFD trading practice. Therefore, without having to own the asset physically one can indulge in trading ways and enjoy higher profits when market situation is favorable.
In direct transactions trading practice, the buyer must pay the full amount required to purchase the financial instrument or the product of interest. For example, if you are planning to buy 100 shares of a specific company priced at 50 bucks/share then, you should be paying 5000 bucks in total to freeze the deal. If so the case, not everybody would be able to afford the full payment every time they try to make a purchase.
Go Long or Go Short
According to the market behavior, one can gain more than their margin value or lose similarly and hence, understand the risk factor involved, which is essential in any forms of trading practices leave alone the CFD.
According to the market’s behavior, one can go long or go short with CFDs. For example, as the cfd brokers australia has gone down drastically, any person who owns a CFD for Santos stocks could go short (sell) to avoid huge losses if one evaluates that price may not rise in the future. On the other hand, if you could evaluate the price rise of a specific share in the near future, then you could go long(buy) and make profits with incrementing price hike.
Goodbye to stamp duty
So, if you are able to predict the market's behavior precisely then you could adjust your CFD movements accordingly and enjoy the profits that keep pouring. CFDs can be implemented in many market types, such as the shares CFDs, indices CFDs, currencies CFDs, commodities CFDs and so on.
But, whichever market you choose to engage in CFD one thing that is for sure is ‘no owning of physical asset’. This very underlying feature of CFD has removed the necessity of imposing ‘Stamp Duty’ and hence, cost-effective for the traders involved in it.
No physical ownership
Already we have seen that this particular feature allows the trader to enjoy a tax-free (no stamp duty) trading process. Not only that, the idea of not owning a financial instrument or product physically saves the buyer from the risk of safeguarding them carefully.
For example, when you are engaged in oil commodities CFD trading, a good thing is you need not worry about physically storing and transporting the oil, or else, it would be an extra burden and expenses to you, which is saved by this CFD concept of trading.