Let’s look at some of the various benefits offered through trading CFDs.
Market availability
CFDs are derivative products, which means the prices are derived from financial instruments in the underlying market. This gives traders the ability to speculate on the price movements of various financial instruments through CFD trading.
Some of the more popular instruments include forex, indices, stocks, bonds, commodities, and more.
With that said, traders could use CFD trading to diversify their portfolios to gain access to these financial instruments.
Ability to go long and short
As mentioned before, traders have the option to open both long (buy) and short (sell) positions. The advantage here is more with the ability to open short (sell) positions because even though possible, it’s difficult to short trades in traditional investing.
This makes the ability to go short (sell) when the market falls quite appealing to traders.
Leverage and margin
Leverage allows traders to open a bigger position with just a fraction of the amount required by depositing a small amount of capital into their account, called margin.
Trading with leverage through margin can magnify a trader's potential profits if the market moves in their desired direction. This is because profits are calculated based on the total value of the position size and not just the margin required to open the position.
Trading hours
Traders are able to trade the market hours for all popular financial instruments. The market trading hours for these financial instruments include the following:
- Indices: The indices market is open 24 hours a day, five days a week.
- Forex: The forex market is also open 24 hours a day, five days a week.
- Commodities: Commodities are also available 24 hours a day, five days a week.
- Stocks: Stocks are available to trade only during the times of the stock exchange they’re listed on. For example, stocks from American companies listed on the New York Stock Exchange are only available to trade during the New York Stock Exchange's open hours.
It doesn’t matter where you are in the world; there is always more than one market open where traders can participate.
Hedging
Traders and investors could incorporate hedging into their strategy to offset potential losses in their existing portfolios. Hedging works by opening a position opposite to the one in a trader’s portfolio.
For example, let’s say a trader has a long position open on Google in their main portfolio, and they see the market is starting to decline.
They could then open a short position on Google through CFDs. This could enable them to offset any losses they might sustain from Google's price decline.