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Why buy and sell CFDs?

By: Ic Markets

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Advantages of trading Contracts for difference
CFDs are derivative products offering distinct benefits including:

1. Liquidity
2. Traded on margin
3. Traded long or short
4. Traded online
5. Low transaction cost
6. Providing access to international markets
7. Benefits from dividends

1. Liquidity
CFD prices are obtained directly from the underlying market. Meaning Contracts for difference offer you access to the liquidity in the underlying market, plus liquidity offered through the CFD provider. Most of the time there is much more liquidity in the Contract for difference market than in the underlying or physical market because of the higher number of participants including private and institutional traders.

2. Trade on margin
Contracts for difference are traded on margin, typically from 5-10% to for shares and 1% for indices. Meaning a more efficient use of your capital as you only need to allocate a small percentage of your funds to secure a trade. This also lets you magnify the returns on your investment with a far smaller capital outlay.
3. Trade long and short
Before CFDs, going short a stock could only be done through a standard broker that would charge hefty fees on top of the normal brokerage. With Contracts for difference traders can now go short any position or market with no extra cost. Going short is as easy as buying with Contracts for difference.

Short selling also provides another benefit which was not available before. Your Contract for difference provider will pay you interest on a short Contract for difference position. This is similar to earning interest on your bank account balance.

4. Trade online
With an estimated 13.4 million Australians with Internet access online share trading has also been on the increase, giving traders more control and constant access to their positions. Most Contract for difference providers offer free software and Contract for difference trading platforms that allow traders to place orders online even outside normal trading hours.

5. Low transaction cost
Trading CFDs can cost you as little as $10 each way in comparison to traditional stock brokerage rates of around $25-30. Although transaction costs are a small portion of your overall trading cost, they have an effect on your bottom line once the quantity of your transactions increases.

6. Having access to international markets
CFDs open up a variety of trading instruments. Most CFD providers offer Contracts for difference on Australian and International shares, indices, sectors, commodities, foreign exchange and treasuries. Most of these markets were not available or accessible to private traders before because of the complex nature or complicated set up of traditional brokerage accounts.
7. Obtain benefits of dividends and stock splits
As CFDs reflect the price and movement of the underlying physical share, they also mirror any corporate actions that take place in the underlying share. This means, if you are a holder of the share CFD, you will also receive dividends and stock split benefits once they become due. However, you are not entitled to any voting rights or franking credits. On the same vein, when you are short a share CFD and the underlying stock goes ex-dividend, you have to pay the dividend amount as you'd if you were short the physical share.

Article Source: http://depositarticles.com/

You can find out more about CFD trading trading with Australia's largest and most popular CFD broker IC Markets, by reading our articles on CFD education including guides and ebooks, all of which you can download for free.

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