When it comes to investing, there are many different options available. However, not all of them are created equal. For example, some may be riskier than others, while others may require a significant upfront investment.
CFDs (or Contracts for Difference) offer a unique investment method that you can tailor to suit your individual needs and goals.
Essentially, CFDs are contracts between two parties to exchange the difference in the value of an underlying asset at the end of the contract period. Therefore, you can speculate on the price movement of an asset without actually owning it.
You can trade extensive assets
With CFDs, you can trade a variety of assets, and it allows you to diversify your portfolio and take advantage of different market conditions. For example, if you think the Australian share market will rise, you could buy shares in an Australian company through a CFD. Or, if you think the price of gold will fall, you could sell gold CFDs.
The beauty of CFDs is that they offer access to markets that may be otherwise unavailable or difficult to trade. For instance, you can trade in the forex market 24 hours a day, five days a week, with currency CFDs.
You can control a more significant position
When you trade CFDs, you only need to put down a small deposit – or margin – to open a position, and it allows you to control a much more prominent position than if you were buying the underlying asset outright.
For example, let’s say you wanted to buy $10,000 worth of shares in an Australian company. With a standard share trading account, you would need to have $10,000 available as cash in your account. However, you may only need to have $1,000 as a margin with a CFD account.
Therefore, you can take advantage of opportunities with less capital outlay. It also means that your potential profits (or losses) are magnified.
You can trade on a leveraged basis
When you trade CFDs, you can choose to trade on a leveraged basis, and it means that you can control a more significant position than the money you have invested.
For example, if you had $1,000 in your account and wanted to trade $10,000 worth of shares, you could use ten times leverage. It would mean that for every dollar movement in the share price, your account would move by 10%.
While leverage can magnify your profits, it can also magnify your losses. So it’s essential to use it wisely and never trade more than you can afford to lose.
You can go short or long
With CFDs, you can decide whether you think the market will go up or down.
If you believe the market will crash, you could sell CFDs. And if the market does fall, your profits will increase as the value of your CFDs decreases.
Conversely, if you think the market will rise, you could buy CFDs. And if the market does rise, your profits will increase as the value of your CFDs increases. This flexibility gives you a great deal of control over your investment strategy and allows you to take advantage of different market conditions.
You don’t have to pay stamp duty
When you buy shares in Australia, you have to pay stamp duty, a tax charged on purchasing shares and other assets, such as property.
The amount of stamp duty you have to pay depends on the state in which you live and the type of asset you’re buying. For example, in NSW, the stamp duty on shares is 0.3% of the total value of the transaction.
However, you don’t have to pay it when you trade CFDs as you are not technically purchasing the asset itself, and it can save you a significant amount of money, especially if you trade frequently or hold an extensive portfolio.
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