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. To maximise their opportunities with this investment strategy, traders should follow the best practices of CFD trading, research investments thoroughly before opening a position, and exercise caution when committing capital to any CFD trade. This is because with CFD trading, you are buying and selling contracts designed to reflect the assets they represent.
Apart from the tax advantages mentioned 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. CFD trading allows traders to open positions in both rising and falling markets, giving you the ability to capitalise on any type of market fluctuation. Thus, any negative movement in your portfolio will result in a profit from your CFD position, negating the loss. This means that market movements can be filtered into the cfd transaction, facilitating profit taking and allowing for shorter investment cycles.
Given the potential volatility of CFD positions, many brokers offer flexible trade size options.