CFDs, or Contracts for Difference, are popular financial derivative products that allow traders to speculate on the price movements of various assets. Compared to stocks, CFDs offer many advantages that may make them a more attractive investment option for traders in Australia. This article will explore nine reasons why trading CFDs may be better than investing in stocks.
To start trading right away, you can visit Saxo.
What are CFDs?
They are financial derivative product that allows traders to speculate on the price movements of various underlying assets. Unlike stocks, which represent ownership in a company, CFDs are simply contracts between two parties that agree to exchange the difference in the value of an underlying asset at the end of the contract. CFDs can be used to trade various asset classes, including indices, commodities, currencies, and even cryptocurrencies.
Advantages of CFDs
Many advantages make CFDs an attractive investment option for traders. These include:
Leverage– When you trade CFDs, you can use leverage to gain exposure to more prominent positions than you would be able to with your capital. Leverage can increase your potential profits and losses, so it is vital to use it responsibly.
Short selling– CFDs allow you to short-sell or bet on the price of an asset falling. It can be helpful if you think the market is about to correct or enter a bearish trend.
Low costs– CFD trading is generally a very cost-effective way to trade. Brokerage fees are typically much lower than stock trading, and there are no stamp duty taxes to pay on CFD transactions.
24-hour trading– The ability to trade around the clock is another advantage of CFDs. As the markets never close, you can take advantage of opportunities as they arise, no matter what time.
Why trade CFDs over stocks in Australia?
Now that we have looked at some of the CFDs’ general advantages, let’s explore why they may be a better choice than stocks for traders in Australia.
Access to international markets– One of the main reasons to trade CFDs is the ability to access international markets. When you trade CFDs, you are not buying the underlying asset but instead speculating on price movements. It means you can trade assets from all over the world without opening a foreign brokerage account.
Tax benefits– Another advantage of CFDs is that they offer tax benefits for Australian traders. A capital gains tax is payable on any profits when you invest in stocks. However, CFDs are treated as derivative contracts for tax purposes, which means that any profits are taxed at your marginal rate. It can make a significant difference to your overall profitability.
Flexibility– CFDs’ flexibility is another reason they may be a better choice than stocks. You can trade various underlying assets with CFDs, including indices, commodities, currencies, and even cryptocurrencies. It allows you to quickly take advantage of opportunities in different markets as they arise.
Ability to trade around the clock– As we mentioned earlier, another advantage of CFDs is the ability to trade around the clock. Because the markets never close, you can take advantage of opportunities as they arise, no matter what time.
Diversification– Diversification is essential to any investment strategy, and CFDs can help you achieve this. You can easily add diversification to your portfolio by trading various underlying assets without investing in multiple asset classes.
Risks of CFD trading in Australia
While CFDs offer some advantages over stocks, it is vital to be aware of the risks involved. These include:
The main risk with CFDs is that you are trading on margin, which means you can lose more money than you have invested, and if the market moves against you, it can lead to significant losses.
Another risk is that CFDs are complex instruments with a high risk of losing money rapidly due to leverage. It helps to consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Finally, it is also essential to be aware of the fees charged by your broker. While brokerage fees for stock trading are typically much higher than for CFD trading, some costs are still involved.
The bottom line
Many brokers can give you direct access to tens of thousands of CFDs across a wide range of markets with competitive spreads and leverage of up to 1:500. CFDs offer many advantages over traditional stock trading, including 24-hour trading, the ability to access international markets, tax benefits, and flexibility. However, it is crucial to know the risks involved before starting trading.
