When it comes to trading in the financial markets, several different options are available to investors. In Australia, the most popular choices are CFD trading and stock trading. Both have their advantages and disadvantages, but which is the better option?
To help you decide, look at these benefits of CFD trading over stock trading.
A significant advantage of CFD trading is that it allows you to trade with leverage, meaning you can manage a more significant position than you would be able to with stock trading, resulting in the potential for greater profits. However, it’s important to note that leverage can also increase risk.
Another benefit of CFD trading is that it allows you to short sell, meaning you can find and seize opportunities in both rising and falling markets.
The margin requirements for CFD trading are usually lower than those for stock trading. This means you have greater leverage available when you trade CFDs than with stocks. CFD traders can therefore trade with less money upfront and have more flexibility.
No stamp duty
In Australia, CFD trades are not subject to stamp duty, unlike stock trades. This is because you do not buy or sell the underlying asset when you speculate on its price. It can save you significant money, especially if you trade frequently.
With CFD trading, you can trade from anywhere worldwide as long as you have an internet connection. It is not the case with stock trading, which is often restricted to specific markets.
Trade 24 hours a day
You can trade CFDs 24 hours a day, five days a week, meaning you can take advantage of global events and trade when it suits you. On the other hand, stock trading is usually limited to regular market hours.
CFD trading gives you access to a broader range of markets than stock trading. In addition to traditional shares, you can trade forex, indices, commodities, and more.
What are the risks of CFD trading?
Risk of margin calls
One of the risks of CFD trading is that it may subject you to margin calls. It happens when the value of your position falls below a certain level, and you are required to deposit more money to maintain your trade. If you are unable to do so, your position will be closed.
Another risk to be aware of is liquidity risk. It occurs when there is insufficient buying or selling activity in the market to absorb your trade. Correspondingly, you may be forced to accept a lower price than you originally wanted.
When you trade CFDs, you effectively enter into a contract with another party, meaning there is a risk that they will not be able to meet their obligations. It is known as counterparty risk.
There is always a risk that the market will move against you. It is known as market risk, and it is something that all traders face, regardless of the type of trade they are doing.
How to trade CFDs
Choose a broker
The first step in CFD trading is to choose a broker. Many brokers are available, so comparing their features and fees is essential before deciding. You can find an international broker with a presence in Australia likeSaxo Bank.
Once you’ve chosen a broker, you’ll need to deposit money into your account. You can do this via bank transfer, credit card, or PayPal.
Choose your trade
Next, you need to decide what you want to trade. For example, do you want to trade shares, forex, indices, or commodities?
Place your order
Once you’ve decided what you want to trade, you need to place your order. You can do this online via your broker’s trading platform.
Monitor your trade
Once your trade is open, you’ll need to monitor it to ensure it’s going in the right direction. You can do this via your broker’s trading platform or mobile app.
Close your trade
When ready, you can close your trade by placing an opposite order. For example, if you bought a CFD, you would sell it to close your position. Once your trade is closed, you will either make a profit or a loss depending on the price movement.