Advantages of CFD Trading

28 December 2020, 05:50

So why trade CFDs?

For one, trading on margin. CFDs typically allow higher leverages than traditional trading like buying stocks on an exchange. There are also usually less regulations surrounding the CFD market, which allows CFDs to have lower capital requirements. What follows is a range of advantages:

Trade on a wide range of markets

With CFDs you are not limited to a specific asset class; you can trade all your favourites with CFDs. With PU Prime you can trade CFDs on:

  • Commodities
  • Indices
  • Shares

No Stamp Duty

Governments usually levy a tax on the purchase of shares (the UK government, for example, levies a duty of 0.5% on the transaction). On the other hand, there is no stamp duty to pay on a CFD trade as parties don’t take physical ownership on any underlying assets.

Margin flexibility

CFDs are traded on what we call margin. This means that you can take a large position in the market without having to deposit the full contract value.

For example, PU Prime offers a leverage of 500:1 on FX, meaning that you can leverage $2,000 to trade $1 million worth of assets. This amplifies the value of your capital, leaving equity free for other transactions.

Calculating P/L in CFDs

Profit and Loss Calculations

The Profit or Loss for a CFD can be calculated using a very simple formula.

P/L = (Sell Price* – Buy Price*) x No. of CFDs

*Without decimal point

It doesn’t matter if you bought or sold first, the profit on a CFD is the difference between the buying and selling price.

You will find plenty of examples of P/L calculations in the remainder of this section.

Profiting from a falling market

With CFDs you can benefit from both directions of an instrument’s price movement. As mentioned earlier, there is no restriction on opening a position with a buy or sell in CFD trading.

An investor can also enter a position with a short-sell. Short selling basically means borrowing an asset to sell a position first, then buying it back at a later time to return the borrowed asset. If the price of the asset has dropped in the meantime, you make the difference.

An example using our simple P/L formula:

You short-sell 10 CFDs at 60.30 because you think the market going to fall. If or when it does, and you get to buy 10 CFDs at 58.85, your P/L would be:

P/L = (6030-5885) x 10

= 145 x 10

= $1450