By Tatevik Karapetyan

Over the past decade CFD trading has turned into the most popular way of trading commodities, stocks, currencies and indices. So, what is CFD? The answer to this question is very simple. A CFD (or Contract for Difference) is essentially an agreement between a client and a broker for exchanging the difference between the opening price and closing price of a contract. In fact, CFDs are considered to be financial derivatives, which enable the investor to take advantage of prices that move up or prices that move down on underlying financial instruments. CFDs are tradeable instruments often used by investors for speculating on those markets. Here are the reasons why you should trade CFDs:

You can hold both long and short positions

CFD trading offers traders flexibility that very few vehicles can provide. It gives them the opportunity of choosing between going long or going short depending on their expectations concerning market direction. If they think the market will rise, they buy, and in case they are of the opinion that it will fall, they sell. This means that with CFD trading you can benefit from making profits when markets are falling (bear market) and when markets are rising (bull market).

CFDs are leveraged products

CFDs, unlike traditional shares, are traded on leverage, which gives the trader a chance of trading the markets using a very small fraction of the total trade value. You can access full market exposure and magnify your potential gains by depositing only a small fraction of the total trade value.  However, you should keep in mind that if the market moves against your position you can lose all or part of your investment, as the key risk with leverage is that it magnifies not only your gains, but your losses as well.

CFDs provide traders with access to thousands of tradeable financial investments

Another advantage of CFDs is that you can easily switch between asset classes. When you are of the opinion that the market is bearish, you can move in to indices and short the index. You can choose to speculate on individual stocks if you are more comfortable with the performance of the equity markets. In a word, with CFD trading you can benefit from the access to a wide range of global markets.

CFDs serve as a great tool for hedging

Due to flexibility and liquidity of CFDs, it is a perfect instrument to hedge the risks of other positions, as a way to guard the wider portfolio against unexpected movements that can occur in the market. So, hedging refers to taking out positions in order to serve as a safety net, in case the markets move in a direction that you don’t expect. It is worth to mention that the amenability of CFDs to hedging is especially considered to be an advantage for those traders who manage wider portfolios, as it helps them cut down the risk profile of prolonged exposure.

There is no underlying ownership or fixed lot size

Since CFDs have no fixed lot requirements, due to flexible order sizes you can have greater control in sizing your trade positions and allocating your portfolio. Among the benefits of CFD trading is that it does not require traders to own the underlying equity index or commodity. So, there is no risk of having to take possession of the underlying physical instrument.

The market for CFDs is greatly liquid

It doesn’t matter what product you are trading, one of the most essential things to consider is liquidity. The market for CFDs is characterized by high liquidity, as it tracks almost directly the underlying asset market, which means that market movements can filter through into the CFD transaction and make it easy to make profits.

In conclusion, CFD trading provides an excellent alternative for both short-term and long-term investors, but it is essential for you to weigh the costs and benefits and act according to what works best within your trading plan.

About the Author:

I am Tatevik Karapetyan.  I enjoy writing about different financial issues, especially about currency market,Forex, Forex trading and etc. My articles will help you stay up-to-date about everything happening in financial world, Forex market in particular.