CFDs are very powerful stock market derivative products. They have many advantages compared to other derivative products such as warrants, turbos, trackers, etc. Due to leverage, CFDs are complex instruments and carry a high risk of rapid loss of capital.
In this article, we will explain to you all the strong points of CFDs. These products are not yet very well known in many Countries, even if for several years, the number of CFD transactions has been breaking records every day. You only need to go to a stock market forum to see that many traders have switched to this type of product.
What is a CFD?
A CFD (Contract for Difference) is a derivative product which allows you to invest in a multitude of financial products without holding it. A CFD contract exactly reproduces the variations in the price of a financial product. From a trading platform, you will be able to invest in several hundred stocks, indices, raw materials, etc.
CFDs allow you to invest small amounts thanks to leverage of up to 30 in Europe on certain products.
The Number of Products to Trade
Thanks to CFDs, you will be able to trade a huge number of products and all this with a single tool, your trading platform. If you want to invest in products such as cryptocurrencies (bitcoin, ripple, ethereum etc.) or even raw materials such as corn, you can, very easily by searching on your Trading platform. Online brokers offer more than 5,000 trading products, enough to vary your portfolio so as not to only hold indices or stocks.
For each product, we explain the advantages of trading with CFDs:
Thanks to CFDs you can trade stocks from all over the world on a single trading platform! Trading stocks via CFDs has many advantages.
On most brokers, you have no commission when opening or closing your position and you will benefit from dividends 100% as if you were the holder of the securities. You will be able to trade stocks with a leverage of up to 20.
Thanks to the leverage effect of CFDs you will be able to invest in indices with small amounts and this is an excellent opportunity! With a leverage of up to 300, you will be able to benefit from variations in the index of your choice.
Do you want to trade gold? money or even oil? CFDs give you the opportunity to trade dozens of commodities very easily. Thanks to the leverage effect you will be able to benefit from the rise/fall of gold for example without investing large sums.
Also called Forex. With CFDs you will be able to trade all the currency pairs that exist on the planet. Forex is the largest volume market in the world.
Many investors only trade in forex, it is a very speculative market where many things influence currency prices. The most traded currency pair in the world is very logically, the Eur/Usd.
Cryptocurrencies have made a sensational entry into the world of speculation. Bitcoin is THE currency of the 21st century, it is now a currency known worldwide and some brokers offer you the opportunity to trade it. You have to be careful because it is a currency with very high volatility. If you regularly trade this currency, we recommend that you put stops so as not to suffer a crash in the event that you are going in the wrong direction. Recently you can trade cryptocurrencies such as Bitcoin, Ethereum, Ripple, Dash and much more.
How CFDs work
The stock market can seem very complicated for beginners, we explain how CFDs work below.
You buy 100 Total Shares CFDs at €40, with leverage of 5, you only invest €800 or 20% of the amount. You want to resell at €42, you gain €200 (because with leverage, it’s as if you had invested €4,000: 100 Total Shares at €40). So, if the stock is at €42, you win 100 x €2.
But in addition, CFDs have many advantages:
ü Compared to other derivative products such as Turbos, Warrants etc.
There is no time limit as with warrants, there is no disabling barrier as with turbos and your earning power does not diminish with the weather. Indeed, you can keep your CFDs as long as you want and there is no barrier, it’s up to you, if you obviously wish, to put a stop at a certain threshold.
ü Take a position on the rise… as well as on the decline!
A considerable advantage of CFDs is that you will be able to take upward and downward positions. If you think that the market, a stock or other financial product will start to fall, you will be able to benefit from the decline. Going short is as simple as taking a position on the rise.
ü Possibility of starting with a small capital
Thanks to the leverage offered by CFD brokers you will be able to start trading with a small budget. Leverage allows you to invest a small percentage of the amount actually invested in the product. If the leverage is 20, you will only have 5% to invest and the variations in the price of a product will be 100 times greater. We advise beginners to start with a budget of around €500.
CFDs are very simple to learn but there is a risk of loss of capital.
A permanently open market
One of the great strengths of CFDs is the permanent possibility of taking a position (except on weekends). Do you want to take a position on the Dow Jones on a Wednesday at 4:52 a.m.? No problem, you can. This asset has revolutionized trading, which is why many traders have switched exclusively to CFDs.
As a reminder, the New York Stock Exchange is open from 3:30 p.m. to 10:30 p.m., on CFD platforms, it is 24 hours a day… (depending on the brokers, hours may vary).
When you open an account with a CFD broker, you have access to a trading platform that is packed with features. For example, you will have access to advanced graphs of all products and you will be able to add numerous technical parameters if you are interested in graphical analysis. Some platforms also offer press reviews, trading ideas, market updates, etc.
You can also add price alerts if you would like to be notified.
You will not be forced to go to other sites to consult prices, graphs or news depending on the platform. In addition, most brokers offer mobile applications which allows you to stay on the lookout for the slightest trading opportunity. If you are new to trading, we advise you to read the Alvexo review which is very helpful for beginners.
Taxation of CFDs
The Taxation of CFDs is generally the same as for purchasing shares via your bank. You will therefore have to report your capital gains on your tax form. It is not possible to give you an exact percentage because it depends on your income since the last law.
Concerning your capital losses, you will be able to deduct them over the following 10 years.
Fees on CFDs
This obviously depends on the broker. Generally, there is no commission apart from the Spread (Price difference between the purchase price of the product and the sale). If you hold your positions for a long time, you will pay a maintenance margin clearly defined with your broker.
On this side, once again CFDs are very advantageous.
You can try trading for free
In fact, each online broker offering CFDs offers you a demo mode with an account of €10,000 to €100,000 to help you hand on the stock market and on the platform. We advise you, if you have never invested in the stock market, to try and learn with the demo mode. It’s an excellent way to progress, plus, as mentioned above, most stock market sites offer free training, online and real seminars in major cities.
To start trading CFDs, you must register with a broker. Once registered, you will have access to hundreds of financial products.