Benefits of CFDs
There are many benefits of trading in CFDs. You have all the advantages of trading the underlying product without the disadvantage of actually owing it.
The value of the CFD’s is always based on the market price of the underlying equity. Not only are CFDs simple and very easy to trade, but the speed and quality of execution is also very beneficial. CFD commissions, where possible, are also much lower than traditional trading.
Just some of the benefits of trading in CFDs include:
Capacity to Take a Long Position
CFDs allow you to open a long position in relation to an instrument where you think the value of that instrument will rise. Alternatively, a long position may be used to off-set or hedge a short position in the instrument or a short CFD in the instrument.
Capacity to Take a Short Position
You can profit from falling as well as rising markets. CFDs allow you to open a short position in relation to an instrument where you think that the value of that instrument will decline. Alternatively, a short position may be used to off-set or hedge a long position in the instrument or a long CFD.
Streaming Prices
Streaming prices are always available when taking a long or short position to enable you to be faster and more efficient in your trading.
Leverage
‘Gearing’ or ‘Leverage’ is a particular feature of a CFD. This stems from the margining system applicable to CFD trades which generally involves a comparatively modest deposit or margin in terms of the overall contract value, so that a relatively small movement in the underlying instrument price can have a substantial effect on your equity. If the price movement in the underlying instrument is in your favour, you may achieve a good profit. One must also be aware of the pitfalls of leveraged investments when the market moves against your position.
Investment
CFDs can be used as investment and portfolio management tools in much the same way as shares or other financial products.
Hedge Market Exposure
In anticipation of a rise or fall in a price of an underlying product, a long or short position respectively can remove or reduce risk on your underlying cash equity position. CFDs for instruments other than shares can also be used to hedge your exposure for example, to hedge interest rates and foreign exchange holdings, or protect against adverse movements in these instruments that may impact negatively on your holdings in other markets.
Limit Trading Risks
City Index also offers an important facility called limited risk trading using guaranteed stop-losses. This allows you to place a closing order on an open position, that fixes the exact amount of money you are risking when you take out that position.
When opening a limited risk trade, you place a guaranteed stop-loss on your position. Even in the worst case scenario of the market moving substantially against you overnight and going straight through your stop-loss level, your trade will still be closed out at your chosen level.
Optional Stop-Loss or our Guaranteed Stop Loss (GSL) Orders
A Stop Loss order is an instruction to us to open or close a CFD (or part of a CFD) at a price which is worse for you than the current price. Placing a Stop Loss order allows you to limit your potential losses from market movements and also allows you to enter a market at a specified level. GSLs are available on selected markets. The GSL can be placed when the CFD is open or on a subsequent date at a distance of not less than 10% from the price quoted or at a distance from the price quoted as otherwise defined in the Market Information Sheets. You may subsequently remove or adjust the level of the GSL during the life term of the trade. The Market Information Sheets may be found by clicking the above link.
Out of Hours Trading
Trades may be opened or closed outside of the hours of the exchange that the underlying instrument is listed on as per the Market Information Sheets.
You have the flexibility to trade world markets by Internet (or phone) and you can hold your position for as long as you like.
The Margin Requirement
The margin requirement for a limited risk trade is equal to the amount which would be lost if the guaranteed stop-loss were triggered (i.e. if you are risking $1,000 on your limited risk trade, you will need to have $1,000 in your account, prior to taking out the trade.
Limited risk trading is not available on the traditional buying and selling of shares, making this form of trading a very useful risk management tool to even the most experienced of investors. There is a small additional charge for limited risk trading, which could be viewed in a similar way to an insurance premium.
Financial Management Benefits of CFDs
Trade Against Profitable Holdings
Equity CFDs can be sold to lock in a profit on an equity holding without incurring a tax liability.
Release Your Equity
Use CFDs to release cash from your existing stock portfolio whilst maintaining your exposure or alternatively use the physical stock holdings to support your margin requirements for CFD positions.