Some of the advantages of CFDs are access to the underlying asset at a lower cost than buying the asset outright, ease of execution and the ability to go long or short. A disadvantage of CFDs is the immediate diminution of the investor's initial position, which is reduced by the size of the spread when entering into the CFD. CFDs are inherently flexible instruments, allowing traders to take positions on both sides of a transaction. If a stock market looks like it is going to fall, the trader can quickly jump to the sell side with CFDs and make as large a profit as he could make on the buy side when the market starts to fall.
In addition, CFDs allow speculation in a wider range of markets that are more complex to trade directly, such as commodity markets and a range of indices, depending on what the broker offers. This makes CFDs a practically useful tool, especially for those managing larger portfolios. One of the main advantages of cfd trading is that you can trade on margin, which gives you "leverage". This means that you can trade without having to deposit the full value of a position.
As your money is not tied up in one transaction, you can use it for other investments. CFD trading gives you access to a wide range of markets otherwise unavailable to retail investors, all from a single trading platform. You can speculate on the price movements of thousands of stocks, indices, currencies, bonds and interest rates around the world. To maximise your opportunities with this investment strategy, traders should follow CFD trading best practices, research investments thoroughly before opening a position, and exercise caution when committing capital to any CFD trade.
Apart from the tax advantages discussed above, cfd broker commissions are almost always significantly lower than the costs associated with trading through more traditional stock brokers, and the only other costs to bear are financing costs, which are a variable cost depending on how long a position is held, and are applied daily as a percentage of the financed portion of your transaction. Because a CFD trade is an agreement to exchange the difference between the opening and closing price of your position, it is more flexible than other forms of trading. This is because with CFD trading, you are buying and selling contracts designed to reflect the assets they represent. CFD trading allows you to open positions in both rising and falling markets, giving you the ability to capitalise on any type of market fluctuation.
With CFD trading, you can trade whether the price of a commodity goes down or up, so you can try to profit from selling opportunities (short selling) as well as buying opportunities. If you are right and your HSBC shares go down in value, then your CFD position will give you a profit, offsetting your loss. If your HSBC shares increase in value, then you can close your CFD position - and offset the loss you incurred against future profits for CGT purposes. CFD trading is standardised in lots, but each market has its own minimum number of contracts that are intended to mimic how the asset trades in the underlying live market.