CFD Trading Benefits
Galvan is finding that CFDs are becoming increasingly popular as they offer significant advantages over traditional methods of investing. CFDs allow you to reap all the economic benefits of share dealing, without physically owning the shares.
Profit when markets fall as well as rise
Markets can of course go down as well as up. With CFD trading you can potentially profit from risng or falling markets because you are trading on the price movement of a financial instrument without physically owning it. This makes it as easy to sell a CFD as it is to buy a CFD.
In a rising market, a trader would look to buy a CFD position first and then sell at a later date to close out their position. This is known as 'going long'.
In a falling market, a trader would look to sell a CFD position first and then buy it back at a later date to close out their position. This is known as ‘going short’.
An efficient use of your capital
CFD trading is leveraged, so you can increase your exposure to an underlying asset from the same initial investment. To open a CFD trade, you need to deposit only a fraction of the total trade value. Leverage is great news if the market moves in the direction that you expect, but it carries a high degree of risk if the market moves against you.
No stamp duty
One key benefit of CFD trading is that you do not incur any stamp duty or need to pay safekeeping custody fees, as you are not making a physical purchase. By the same token, you will not have any shareholder voting rights.
Hedge other investments
As CFDs offer the ability to go short as easily as long, they can be used to provide ‘insurance’ against price falls in an existing portfolio. For example, if you have a long-term portfolio that you wish to keep, but you feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by ‘hedging’ your position. If the value of your portfolio falls the profit in the CFDs should offset these losses.
Pairs trading
Pairs trading involves taking a long and short position simultaneously in two related shares. The expectation is that one will outperform the other.
Here are a few examples:
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Buy British Petroleum, sell Royal Dutch Shell
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Buy AstraZeneca, sell GlaxoSmithKline
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Buy Barclays, sell Lloyds
Trade financial markets around the world
CFD trading gives you access to a wide range of markets that would not otherwise be available to retail investors. It is as easy to trade on the price movement of commodities such as oil or gold as it is to trade an individual equity. CFDs also allow you to speculate on whole indices or sectors from a single trade.
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