Easy to understand
Unlike other financial derivatives, like futures, forwards, and swaps, CFDs are incredibly easy to understand and simple to trade. This is particularly true if you have some experience trading stocks, currencies, commodities, or cryptocurrencies.
Higher Leverage
CFDs are highly leveraged financial products. This offers immense profit potential, although it’s important to remember that this comes at heightened risk. Leverage provides increased exposure to an underlying asset, as the trader needs to put down only a small portion of the full value of the trade. This benefits those looking to make high amounts of short-term trades.
Here’s how CFD leverage trading works: Let’s say you wish to buy 10 shares of Company A and each share costs $100. Going by traditional trading, you would need $1,000 to gain the desired exposure. Now let’s assume that Company A’s share price rises by $20. Now each share is worth $120. This means you can sell your 10 shares for $1,200, making a profit of $200. If the market had moved in the opposite direction, taking Company A’s share price down by $20, each share would have been worth $80. If you decided to sell your shares of Company A at this time, they would sell for $800 and you would book a loss of $200.
Now let’s throw in some leverage into the trading. Let’s say your broker offers 50:1 leverage. To gain exposure to 10 shares of $100 each, you would need to put down only $20. When the market moves favourably, your profits are still $200. However, you have earned this with a much lower investment of only $20 (versus $1,000 with traditional trading).