Contracts For Difference (CFD) has been gaining popularity among traders in the financial market nowadays. But to newbies, gaining knowledge about trading CFDs is a must. How does it work and what are the sets of pros and cons that a trader might encounter along the way?
CFD is acquired by the calculations of the difference in the entry and exit points of each contract. Though the trader does not own an underlying asset in CFD, it is somehow advantageous as it mirrors the movement of the price of the underlying asset. Two things can happen here, the trader can earn profit or loss depending on your prediction and the movement of the market.
Advantages of CFD Trading
· Higher Leverage
Leverage pertains to the money that the broker will lend you so you can enter a trade. It is the opposite term for margin which is the minimum amount of investment that you are required to invest to be able to enter a trade.
· Ease of Access Globally
Contracts for Difference offers a wide variety of financial instruments such as currency exchange, stocks, commodities, treasuries, and indexes.
· There Are No Rules For Short Selling
There is a lot of financial markets nowadays that has a set of rules for short selling. Most of the time, these rules are on the disadvantage of the investor. But with CFD, there are no such things as rules when it comes to short selling. You can short sell anytime to minimize losses and protect your profit.
· Little to No Fees
Commission and other fees can take a toll on your account. In CFD, the only thing you have to pay is the spread. No commissions. No hidden fees.
· No restrictions For Day Trading
Other financial markets require traders to place the maximum number of trades every day.
Frequently Asked Questions About CFD Trading
1. Are the profits earned through CFD, taxable?
Yes. Countries like Australia and the UK pay for capital gains tax for every profit they obtain from CFD trading. In case CFD is your main source of income, the profit you get from it will be seen as income tax. Meanwhile, because you do not own the underlying asset in CFD, you are exempted from paying the stamp duty.
2. Is CFD safe?
Yes, trading CFDs is safe but some factors need to be considered to determine if your money is really safe. The first thing that you need to ensure is the legitimacy of your broker. The broker must be regulated by the country where you are in. Secondly, see to it that you approach CFD the right way. Make some research and formalize a good strategy to avoid incurring a string of losses.
3. Is CFD Trading allowed in the USA?
Unfortunately, CFD trading is NOT allowed in the USA.
4. Is there an expiry in CFD?
Depending on the kind of instrument that you use in CFD trading, the expiry date can vary at the end of the month, once every quarter, and others.
5. Are CFD stocks a scam?
Countries like Germany, the UK, Australia, and Italy recognize CFD stocks legally. But, due to the number of unregulated providers, there are CFD transactions that are unsafe and could only incur losses on your part.