Editorial

Five reasons why you should trade forex CFDs

A contract for difference (CFD) is an agreement between a trader and CFD broker, to exchange the difference in value of a particular financial instrument or asset, between the time at which the contract is opened, and the time at which it’s closed.

There are many benefits to trading CFDs, with foreign exchange (forex) CFDs an advantageous addition to your portfolio in particular. So, why should you trade forex CFDs?

You can find out what forex trading is on Plus500, for example, and once you’ve got to grips with the forex market, you can delve in to our list of just five of the main benefits of trading forex CFDs.

1. Long and short positions

With forex CFD trading, you do not own the underlying asset, meaning you have the ability to go short, as well as long. By taking short and long positions, you can potentially profit from falling markets, as well as rising ones.

Opening a short CFD position can be done by selling your chosen number of contracts. When you wish to close your trade, you buy the same number of CFDs for a lower price. Doing this gives you the chance to make a profit when markets fall in price, something that cannot be done with traditional trading.

2. Small initial deposit

When trading forex CFDs, you only have to pay a small percentage of the trade value. This is done with the use of leverage trading. The initial deposit, sometimes known as the margin, can be a fraction of the total value of your position.

For example, with the use of margins and leverage – which we explore more below – you might only have to pay out 5% of the size of your position, meaning you have a greater access to the market, as well as the potential for even higher earnings (or losses).

3. Speculate on price movements

Another huge benefit of trading forex CFDs is that you never actually own the underlying asset, as CFDs are a financial derivative. If you’re used to trading and investing, CFDs will generally feel a bit more familiar than other derivatives.

With CFD trading, you’re essentially buying and selling contracts designed to mirror the assets they represent. A single CFD usually represents the standard unit of trading of its underlying market. Whilst this makes CFDs a little easier to understand, it also means that speculating on price movements is more efficient, and you can buy or sell a unit at any point.

4. Trade shares, indices, forex and more

Not only can you trade forex CFDs, but once you’ve got the hang of CFD trading, you’ll have access to a huge variety of global markets, including shares, indices, commodities such as gold, and more!

Not only do CFD brokers tend to offer access to a wide range of assets, but every single market is available on a single trading platform.

5. Higher leverage

The use of leverage can be complex, and as well as being an advantage, can be potential disadvantage too. CFDs tend to provide you with higher leverage than traditional trading.

Leverage is essentially borrowed capital for the use of trading. CFD trading platforms often allow the use of leverage trading, offering the potential for a trader to access and control a larger position in the market.

Remember, whilst lower margin requirements mean less capital outlay for the trader, with the potential for greater returns, increased leverage can also magnify a trader’s losses.

However, with the use of leverage, you could potentially have more funds to trade on the live prices of a huge range of markets. And with the world’s currencies right at your fingertips, with no UK stamp duty to pay (at the time of writing), it’s clear why there are so many benefits to trading forex CFDs.

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