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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 rising 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:

  • Buy British Petroleum, sell Royal Dutch Shell
  • Buy AstraZeneca, sell GlaxoSmithKline
  • 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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Trading in Contracts for Difference may not be suitable for all investors due to the high risk nature of the product. You may lose all or more of your initial deposit through the use of leverage and may be required to make additional payments by way of margin on a frequent and sometimes daily basis. Failure to do so can result in the closure of part or all of your position. Please refer to Galvan’s risk warning.