CFD is the abbreviation for contract for differences, which is a type of futures contract where you settle up in cash payments and not through the sale of securities or commodities. Essentially, CFD trading allows investors to participate in trading securities but it never requires them to actually own it because gains and losses are paid with cash.
1. No Short Shelling Rules
Short selling of assets occurs when the seller of the asset never actually owns the asset they promise to deliver to a buyer. Essentially, brokers lend the instrument to the buyer. This practice is governed by plenty of rules that say that the broker can charge interest on the transaction and you cannot short a stock if the price is crashing.
Because an investor never owns the security or good in a CFD contract, they are not limited by shorting or borrowing rules. You can short an asset whenever you want because there is no ownership at stake. Moreover, there are no costs for shorting on the CFD market.
Basically, CFD transactions mean that investors are not limited by rules when they missed out on a chance to buy at a low price.
2. Low Fees
You still need a broker to participate in trading using this instrument. However, CFD brokers are different from traditional brokers in one big way: they charge few, if any, fees for their services.
CFD brokers make money when the trader pays the spread and there is no need to assess a fee per trade or a management fee. However, you do have to pay the spread when you enter and leave the contract, which means that CFDs are not profitable for small sales.
3. No Limits Trading
Day trading has certain limitations in most markets. Most of the time, there are a limits on the number of trades that can be made or the minimum amount of capital required for entry. However, because the CFD market does not require the investor to actually own an asset, these restrictions are mostly waved. Investors can trade on the CFD market with $1,000 and can participating in day trading as much as they like.
4. Traders Can Use Different Financial Vehicles
CFDs are most commonly associated with stocks. However, you can also trade options on commodities, currency, indices and treasury assets.