Advantages of trading CFDs

Let’s take a look at the advantages of trading CFDs, so you can decide whether you want to start trading contracts for difference today.

1. What are the advantages of trading CFDs?

2. Profit from falling markets

3. Protect your capital

4. Similarity to traditional trading

5. Ability to trade stocks, indices, forex, and other instruments

6. Hedging potential with CFDs

What are the advantages of trading CFDs?

Trading CFDs offers access to a wide range of markets, the opportunity to use leverage, and flexibility for short selling, which explains why it has become so popular in recent years. However, if you’re still deciding, here’s a simple guide on how to start trading CFDs.

Profit from falling markets

The main difference between CFDs and traditional trading is that when trading CFDs, you do not own the underlying asset. This brings several advantages, including the ability to trade both rising and falling markets.

To open a short position with CFDs, you simply sell the desired number of contracts. When you decide to close the trade, you buy back the same number of CFDs.

This approach allows you to profit from price declines in the markets, expanding your trading opportunities.

Imagine you've analyzed a stock and believe its price will decrease. Instead of searching for other opportunities, you can short the stock using CFDs, which will earn you a profit if the price falls. However, if the price rises, you will face a loss.

Unlike traditional investing, when shorting CFDs, you do not need to borrow any shares. This process is similar to opening a long position but in reverse. And you can sell any market that you would otherwise buy, including stocks, indices, commodities, or bonds.

Capital preservation

One of the advantages of not owning the assets you trade is the use of leverage. Leverage allows you to open positions without paying the full value of the asset – instead, you pay a margin, which is a deposit.

This system works by speculating on price movements, rather than directly owning the assets.

For example, if you want to trade 100,000 USD on the USD/CAD pair, you only need to deposit 1,700 USD. This way, you don’t have to tie up all your capital in a few positions.

However, it’s important to note that your profit or loss will depend on the full value of the 100,000 USD. If the USD/CAD price moves 5% against you, you’ll lose 5,000 USD, which represents a large portion of your margin. Therefore, it's crucial to use risk management tools like stop-loss orders, take-profit, and guaranteed stops.

Similarity to traditional trading

CFDs are not the only instrument that allows trading on financial markets without the direct purchase of assets. There are several other derivatives (depending on the country's legislation), such as futures, options, and spread betting.

However, if you are accustomed to traditional trading and investing, CFDs may be somewhat more familiar to you than other derivatives. This is because, when trading CFDs, you buy and sell contracts designed to closely mirror the price movements of the underlying assets.

A single CFD usually represents a standard trading unit of the underlying asset. When determining the position size, you decide how many contracts you want to buy or sell.

For example, if you want to trade the equivalent of 50 shares of Unilever, you simply buy 50 Unilever stock CFDs. If you want to short one lot of the NZD/USD pair, you simply sell a CFD on NZD/USD.

Trade stocks, indices, forex and more

CFD brokers typically offer access to a wide range of assets, meaning you're not limited to a single type of market. On platforms like y4trade.com, you can trade:

Stocks, including major companies like Apple and Amazon

Popular global stock indices, such as the S&P 500, DAX, and more

Various forex pairs, from major to minor and exotic

Commodities like gold, silver, and other key resources

Additionally, each market is accessible from a single platform, making it easy and quick to switch between different markets. With just a few clicks, you can start trading.

Hedge with CFDs

Remember, CFDs can also be used to open short positions. In addition to profiting from falling markets, this is also a useful tool to balance risks in case of negative movements in your portfolio.

For example, if you own 1,000 shares of American Airlines but are concerned that a sudden rise in oil prices in the short term could negatively affect the company’s performance, you could sell the shares. However, this would mean closing your position.

Alternatively, using CFDs, you can open a short position on 1,000 shares of American Airlines. If negative movements occur in your portfolio, your short CFD position will provide a profit that can offset the loss from other investments.

If the airline's stock starts to rise again, simply close your CFD position, realizing a profit or minimizing a loss.