Seven reasons to trade CFDs rather than stock in London
A CFD, or Contract for Difference, is a type of derivative trading that allows investors to wager on the price movement of underlying assets without actually owning the asset itself. CFDs are traded on margin, meaning traders only need to put down a small deposit – known as the margin – to open a position. It makes CFDs an attractive proposition for traders looking to profit from small price movements.
There are numerous reasons why CFD trading may be preferable to stock trading for those based in London.
One of the primary attractions of CFD trading is the high degree of leverage that is on offer. Leverage is the ratio of the value of your CFD position to the margin required to open that position.
For example, if a broker offers 50:1 leverage on a particular stock, you will only need to put down 2% of the total value of the trade as margin (the other 98% being provided by the broker). It allows you to take much larger positions than possible if you traded stocks with your capital.
CFD trading also allows investors to short sell – or bet against – an asset without actually owning it. It can be helpful in several scenarios, such as when you expect the price of an asset to fall but don’t want to sell your existing position in that asset.
There is a stamp duty charge of 0.5% on all share purchases in the UK. This charge does not apply to CFD trades, meaning that you can save money on your transactions by trading CFDs instead of stocks.
CFD trading platforms allow you to trade a wide range of underlying assets, including stocks, indices, Forex pairs, commodities and even cryptocurrency. You can utilise the price movements in various markets as it allows you to diversify your portfolio.
The vast majority of CFD brokers offer 24-hour trading on weekdays, meaning that you can take advantage of price movements outside of regular UK trading hours. On the other hand, stock trading is typically limited to the hours between 9 am and 4.30 pm on weekdays.
CFD brokers generally offer professional-grade trading platforms with various features and tools designed to help you make successful trades. These platforms are often more sophisticated than the ones offered by stockbrokers.
Most CFD brokers offer demo accounts which allow you to trade with virtual money before putting down any actual capital. It can be a helpful way to test out a new trading strategy or familiarise yourself with a particular platform before committing any of your own money.
These fees may include but are not limited to inactivity fees, financing charges and account management fees. Check the terms and conditions of your chosen CFD provider before opening an account to avoid being charged any unexpected fees.
When trading with leverage, it’s important to remember that it can also magnify your losses. Not only that, but the use of leverage can create losses that exceed your initial capital, so you should only invest money you can afford to lose.
Market liquidity involves how easily an asset can be bought or sold without affecting its price. Some assets, such as shares in small companies, can be illiquid – meaning that there may not always be someone willing to buy or sell them at the price you want. It can make it difficult to exit a trade quickly if the market moves against you.
The UK’s financial regulator, the Financial Conduct Authority (FCA), does not currently regulate CFD trading. Some CFD brokers may not be subject to the same strict rules and regulations as other types of financial institutions. As a trader in the UK, you can trade CFDs with Copenhagen-based Saxo bank, which is a regulated broker in many countries including the UK, Australia, Singapore, Hong Kong, and more.
Discretionary dealing is where your broker uses their judgment to execute trades on your behalf, rather than strictly following your instructions. While this may sometimes result in better trade execution, it also means that your broker has more control over your account – and may not always act in your best interests.