Top 3 advantages of CFD trading

This post was originally published by Deriv on 25 August 2021

More traders trade contracts for difference (CFDs) daily because of its many benefits. If you already know what CFD trading is but are still trying to decide whether to start, let us tell you its major benefits. Plus, we’ll also share how you can get started on your online CFDs trading journey.

Wide selection of financial markets and assets

One of the main advantages of CFD trading is that you can access all the largest financial markets. Trading a wide selection of assets in different markets allows you to diversify your portfolio – this is considered a good risk management strategy, as a diversified portfolio can help to prevent big losses.

On Deriv, you can trade forex, stocks & indices, ETFs, and commodities during regular market hours. If you prefer trading on weekends, Deriv also offers CFDs on cryptocurrencies and synthetic indices (under derived indices) that are available to trade 24/7. There are two CFD trading platforms you can choose from on Deriv – the popular Deriv MT5 and the customisable Deriv X.

Opportunity to profit from both rising and falling financial markets

In CFD trading, you predict the price movement of an underlying asset without buying it. Remember, you’re trading on a contract for difference of the asset. So it doesn’t matter if the price rises or falls; as long as it moves according to your prediction, you may earn a profit. Unlike other trade types, a CFD trade can be opened with either a buy order (going long), or a sell order (going short) even if you don’t have anything to sell.

Here’s how it works: let’s say you believe the price of an asset will drop because the company failed to reach its quarterly targets, which usually leads to a sell-off – a large number of its shares being sold at a low price. If you place a sell order on its stock CFD and your prediction is correct, you earn a profit. To successfully execute this kind of trade, it’s important to understand the general logic behind going long and going short in CFD trading.

Cost-effective capital utilisation

As CFDs are typically traded on margin, you can use it as an opportunity to build a cost-effective trading strategy. Since you only need to pay a small percentage of the trade value, you can allocate your budget to several trades at once. There are also risk-management tools like the stop loss feature, which protects you from losing too much of your capital if a trade goes against your prediction.

You also won’t be paying extra tax on asset ownership since you don’t own the underlying asset when trading CFDs, which can be a big plus. Most brokers also don’t charge commissions for CFD trading, making it even more cost-effective.

How beginners can benefit from CFD trading

Professional traders have quite a few CFD trading strategies. Some of them are very complex and require technical knowledge. But it doesn’t mean that beginners can’t enjoy the advantages of trading CFDs too. Here is a relatively easy way to start: news trading.

Most financial markets are affected by economic and political events in one way or another. As a result, big announcements are usually followed by big price fluctuations of the related assets. For example, the British pound (GBP) experienced a big drop right after Brexit, or when Bitcoin’s price skyrocketed when Tesla bought over a billion USD worth of it in early 2021.

You can start your CFD trading journey by watching the news and learning how they affect asset prices. Once you know how to connect the dots, you can start predicting the price movements and benefit from them.

If you’re not confident with news trading, try trading Deriv’s synthetic indices. With these synthetic indices, you’ll get to trade online CFDs on assets that simulate real-world market movements but aren’t affected by world events and market liquidity. 

Whatever market you choose to start your CFD trading journey with, you can practise trading with virtual funds in a demo trading account before investing real money. Create your free Deriv demo account today, and try CFD trading on either Deriv MT5 or Deriv X.

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