One of the major advantages of CFDs is that they are flexible and cover a range of markets which are all tradable from the one convenient location – your CFD platform.
In the past, if a retail client wanted to trade a range of markets they would need to employ the services of and maintain an account with a broker for each market they wanted to trade, i.e. equities, futures, commodities, etc.
These days, any CFD provider worth their salt will provide access to a range of markets including, but not limited to, Australian equities, international equities, indices, currencies, commodities and ETFs.
Clients simply open a single account, fund it, and then have access to this broad range of markets.
The key benefit of this increased coverage is diversity and, as an extension of that, ease with which clients can gain direct exposure to a certain market.
In the past, if an Australian retail share investor wanted to gain exposure to oil in order to take advantage of rising crude prices, their best avenue would be to buy a company like Woodside Petroleum.
In purchasing shares in Woodside, however, the client would be exposed to company risk, e.g. the risk that the people running the company are incompetent and their actions cause the stock price to fall despite rising crude prices.
With CFDs, a client can simply buy a contract in oil, whether it be West Texas Intermediate, Light Sweet Crude, or Brent Crude. This allows the client to gain direct exposure based on their convictions, without the added layers of risk.
Furthermore, most CFD providers will offer partial contracts which are smaller in size and subsequently more easily tradable for clients who do not want to take on too much exposure.
Another example of the benefit of increased coverage through CFDs is access to international shares.
The Australian market has a very small and insignificant tech sector. The biggest company in the space (as at 16/05/2011) is Computershare which is considered by some to be a financial services company, not a true tech company.
With CFDs, clients are able to gain exposure to tech giants such as Google, Microsoft, and IBM, just to name a few.
In this example the client is able to gain direct exposure to a market that they previously wouldn’t have been able to. Finally, the increased coverage offered via CFDs means that traders can more easily hedge their exposure.
Hedging involves taking trades in the opposite direction to the dominant position of your portfolio. For example, if you are long two mining stocks and two highly correlated commodities, you are significantly exposed to commodity prices.
As such, you might consider taking a short position in the mining index to hedge out some of your exposure.
Another example is if you have a well balanced portfolio with 10 long share positions. To protect against a sharp fall in the market, you could take a short position in the ASX200 index to hedge out some of your long exposure.
The key purpose of hedging is to take a position that will increase in value as the value of the dominant positions in your portfolio go down, if the market moves against you.
With a CFD broker, you can take all of the positions noted above via the one trading platform.
Whether it be an equity, market sector, or index position, all of these trades can be executed via the one trading platform, both long and short.
CFDs have certainly changed the retail trading landscape for the better, providing increased diversity and flexibility for retail traders and investors.